AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER __, 2005
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post Effective Amendment No. 1 to
FORM S-11
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
American Church Mortgage Company
(Exact Name of Registrant as Specified in Governing Instruments)
10237 Yellow Circle Drive
Minnetonka, MN 55343
(952) 945-9455
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
Philip J. Myers, President
10237 Yellow Circle Drive
Minnetonka, MN 55343
(952) 945-9455
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of Agent For Service)
copies to:
Philip T. Colton, Esq.
Winthrop & Weinstine, P.A.
225 South Sixth Street, Suite 3500
Minneapolis, MN 55402
(612) 604-6400
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Post-Effective Amendment to the Registration Statement
becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
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Amount Proposed Maximum Proposed Maximum Amount Of
Title Of Each Class Of Securities to be Offering Price Aggregate Offering Registration
To Be Registered Registered Per Unit Price Fee
--------------------------------------- -------------------- ------------------- -------------------- ----------------
--------------------------------------- -------------------- ------------------- -------------------- ----------------
Series B Secured Investor Certificates $23,000,000 $1,000(1) $23,000,000 $2,914(2)
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(1) Certificates may be purchased in any multiple of $1,000.
(2) Previously Paid
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Prospectus
AMERICAN CHURCH MORTGAGE COMPANY
$23,000,000 of Series B Secured Investor Certificates
American Church Mortgage Company is a real estate investment trust, or
"REIT." We make mortgage loans to churches and other non-profit religious
organizations. We also purchase mortgage-secured bonds issued by such
organizations.
We are offering our Series B Secured Investors Certificates.
We may offer new certificates with maturities ranging from two (2) to
fifteen (15) years. Renewal certificates, which aggregate no more than
$3,000,000 principal amount, with maturities ranging from two to four years will
be offered to investors desiring to renew certificates from prior offering.
Depending on our capital needs, certificates with certain terms may not always
be available. We will periodically establish and may change interest rates on
the unsold certificates offered in this prospectus. Current interest rates can
be found in the "Description of the Certificates" section of this prospectus.
Investors are advised to check for prospectus supplements as interest rates are
subject to change. However, once a certificate is sold, its interest rate will
not change during its term.
The certificates are non-negotiable and may be transferred only in limited
circumstances with the consent of our advisor. There is no public market for the
certificates. The certificates will not be listed on any securities exchange or
NASDAQ. Our investors may have difficulty selling certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The certificates are not certificates of deposit or similar obligations and
are not guaranteed by the FDIC or any other governmental fund or private entity.
Investing in certificates involves risks and conflicts of interest. See "Risk
Factors" beginning on p. 6 and "Conflicts of Interest" beginning on p. 15. Those
risks include the following:
>> If we lose our REIT status, we will be taxed as a corporation, which could
affect adversely our ability to make interest payments to holders of
certificates.
>> We have conflicts of interest with the underwriter and our advisor, which
are controlled by the same person. >> You may have difficulty selling your
certificates because there is no public market and our advisor must approve
all transfers of certificates.
>> Our mortgages and bonds are secured by churches, which are typically
limited purpose properties.
The use of forecasts in this offering is prohibited. Any representations to
the contrary and any predictions, written or oral, as to the amount or certainty
of any present or future cash benefit or tax consequence which may flow from an
investment in this program is not permitted.
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Series B Secured Investor Certificates Price to Public Selling Commission (2) Proceeds to Us
------------------------------------------------- ------------------------ ------------------------------ ------------------
------------------------------------------------- ------------------------ ------------------------------ ------------------
Minimum Purchase $1,000 (1) $40.00 $960.00
------------------------------------------------- ------------------------ ------------------------------ ------------------
------------------------------------------------- ------------------------ ------------------------------ ------------------
Total $23,000,000 $845,000 (3) $22,155,000
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(1) Certificates may be purchased in any multiple of $1,000.
(2) Estimated for purposes of this table based on the average commission we
will pay the underwriter. Actual commissions we pay the underwriter will
vary based on the term to maturity of the certificates sold on our behalf.
Includes 1.00% underwriter's management fee that we will pay to the
underwriter upon original issuance of each certificate. Of the $23,000,000
Series B Secured Investor Certificates, $3,000,000 of the certificates is
reserved for the renewal of the Series A Secured Investor Certificates.
These certificates will have maturities ranging from two to four years.
(3) The average commission we will pay the underwriter on the renewal of the
Series A Secured Investor Certificates is 1.5%. An underwriter's management
fee will not be paid on any certificates that are renewed.
AMERICAN INVESTORS GROUP, INC.
Minnetonka, Minnesota
September __, 2005
Table of Contents
PROSPECTUS SUMMARY..........................................................................................................1
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RISK FACTORS................................................................................................................6
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WHO MAY INVEST.............................................................................................................11
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USE OF PROCEEDS............................................................................................................12
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COMPENSATION TO ADVISOR AND AFFILIATES.....................................................................................13
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CONFLICTS OF INTEREST......................................................................................................15
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DISTRIBUTIONS..............................................................................................................16
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CAPITALIZATION.............................................................................................................18
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SELECTED FINANCIAL DATA....................................................................................................19
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................................20
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OUR BUSINESS...............................................................................................................25
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MANAGEMENT.................................................................................................................38
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SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS................................................................................40
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CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT.....................................................................41
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THE ADVISOR AND THE ADVISORY AGREEMENT.....................................................................................42
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FEDERAL INCOME TAX CONSEQUENCE ASSOCIATED WITH THE CERTIFICATES............................................................43
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FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH REITS......................................................................45
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ERISA CONSEQUENCES.........................................................................................................46
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DESCRIPTION OF CAPITAL STOCK...............................................................................................46
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DESCRIPTION OF THE CERTIFICATES............................................................................................47
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SUMMARY OF THE ORGANIZATIONAL DOCUMENTS....................................................................................56
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PLAN OF DISTRIBUTION.......................................................................................................59
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COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES......................................................60
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LEGAL MATTERS..............................................................................................................61
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EXPERTS 61
REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION..........................................................................61
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ADDITIONAL INFORMATION.....................................................................................................61
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INDEX TO FINANCIAL STATEMENTS.............................................................................................F-1
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i
PROSPECTUS SUMMARY
This summary highlights some information from the prospectus. It may not be
all the information that is important to you. To understand this offering fully,
you should read the entire prospectus carefully, including the risk factors and
the financial statements. In this prospectus, American Church Mortgage Company
refers to itself as "we," "us, " and "our." Our prospective investors are
sometimes referred to as "you" or "your."
AMERICAN CHURCH MORTGAGE COMPANY
American Church Mortgage Company is a real estate investment trust, or
REIT. We make mortgage-backed loans from $100,000 to $2,000,000 to churches and
other non-profit religious organizations for the purchase, construction or
refinancing of real estate and improvements. As of June 30, 2005 we have 78
mortgage loans outstanding in the original aggregate principal amount of
$34,670,879, and own church bonds having a face value of $9,654,790. The
principal balance of our loan and bond portfolios outstanding at June 30, 2005,
were $33,068,670 and $9,654,790, respectively. We intend to continue to lend
funds pursuant to our business plan as funds from the sale of our securities and
otherwise become available.
American Church Mortgage Company was incorporated in the State of Minnesota
on May 27, 1994. Our executive offices and those of our advisor are located at
10237 Yellow Circle Drive, Minnetonka (Minneapolis), Minnesota 55343. Our
telephone number is (952) 945-9455.
OUR ADVISOR
We are managed by Church Loan Advisors, Inc. Church Loan Advisors, Inc. is
referred to in this prospectus as our advisor. Our advisor manages our business
activities, provides our office space, personnel, equipment and support
services. Our advisor assumes most of the normal operating expenses we would
otherwise incur if we had our own employees and directly managed our business
activities. Pursuant to the advisory agreement between us and our advisor, we
pay our advisor advisory fees based on our average invested assets and certain
expenses. In addition, our advisor receives one-half of any origination fees
associated with a mortgage loan made or renewed by us. Our advisor is affiliated
by common ownership with American Investors Group, Inc., which is the
underwriter of this offering (the "Underwriter").
1
THE CERTIFICATES OFFERED
Issuer................... American Church Mortgage Company
Trustee.................. Herring Bank, Amarillo, Texas
Securities Offered....... Series B Secured Investor Certificates
Offering Price.......... 100% of the principal amount per
certificate; multiples of $1,000 per
certificate.
Maturity................. 2, 3, 4, 5, 6, 7, 8, 9, 10, 11,
12, 13, 14 and 15-year maturities.
Certificates will mature on the
last day of the calendar quarter
in which they were purchased. We
may cease offering specified
maturities, and begin re-offering
any unavailable maturity, at any
time.
Interest Rates......... As of the offering date, the
interest rates we will pay for
each maturity of certificates are
set forth in the section entitled
"Description of the Certificates"
to this prospectus. However,
investors are advised to check for
prospectus supplements as interest
rates are subject to change.
Interest Payments....... Interest will be paid quarterly.
Principal Payment....... Unless you renew your certificate,
we will pay the entire principal
amountof the certificate at maturity.
Redemption............. We generally will not be required
to redeem outstanding
certificates. We will redeem
outstanding certificates only in
the following cases: o If you die,
your representative may require us
to redeem your certificate, subject
to an aggregate limit of $25,000 in
any calendar quarter for all
redemptions.
o If there is a change of
control of our business, we
may redeem each outstanding
certificate at our option.
o If our outstanding
indebtedness exceeds the
amount of indebtedness
allowed by our bylaws, we may
redeem certificates in an
amount sufficient to bring
our outstanding indebtedness
into compliance with our
bylaws.
o If we terminate our advisory
agreement with Church Loan
Advisors, Inc., our current
advisor, for any reason, we
will be required to offer to
redeem all outstanding
certificates.
If we redeem any certificate, we
will pay the holder an amount
equal to the outstanding principal
amount of the redeemed certificate
plus accrued but unpaid interest.
Collateral............. To secure payment of the certificates,
we will assign to the trustee as
collateral non-defaulted mortgage-
secured promissory notes and church
bonds with an aggregate outstanding
principal balance equal to at least
100% of the aggregate outstanding
principal amount of the certificates.
We will not assign underlying
mortgages securing the assigned
promissory notes. To the extent not
collateralized, the certificates will
constitute a subordinated claim
against the issuer.
Renewal................ Certificates are renewable at your
option at the interest rates we are
offering at the time the certificate
matures. We may cease offering to
renew certificates at any time.
Transferability........ The certificates are non-negotiable
and may be transferred only in limited
circumstances with the consent of
our advisor.
Absenceof Public Market There is no market for the
certificates. We do not believe
that a public market will develop.
You may not be able to sell your
certificates.
Sales Commission...... We will pay the underwriter a
commission for assisting us in
selling the certificates. The
underwriter will receive a sales
commission of up to 3.0% and an
underwriting management fee equal
to 1.0% of the principal amount of
certificates sold. We will pay the
underwriter a commission up to
1.5% when a certificate is
renewed.
Outstanding Indebtedness Our bylaws prohibit us from borrowing
in excess of 300% of Shareholders'
Equity.
2
USE OF PROCEEDS
We will use the proceeds received from the sale of the certificates
principally to fund mortgage loans we make to churches and other non-profit
religious organizations and to purchase bonds issued by those organizations.
Some of the proceeds may be used to pay down our line of credit, redeem our
equity securities and repay maturing certificates.
OUR REIT STATUS
As a REIT, we generally are not subject to federal income tax on income
that we distribute to our shareholders. Under the Internal Revenue Code, we are
subject to numerous organizational and operational requirements, including a
requirement that we distribute to our shareholders at least 90% of our taxable
income as calculated on an annual basis. If we fail to qualify for taxation as a
REIT in any year, our taxable income will be taxed at regular corporate rates,
and we may not be able to qualify for treatment as a REIT for that year and the
next four years. Even if we qualify as a REIT for federal income tax purposes,
we may be subject to federal, state and local taxes on our income and property
and to federal income and excise taxes on our undistributed income.
RISK FACTORS
An investment in our certificates involves a degree of risk. See "Risk
Factors" for a more complete discussion of factors you should consider before
purchasing certificates. Some of the significant risks include:
>> As a "best efforts" offering, all or a material amount of the
certificates may not be sold, and consequently, some or all of the
additional capital we are seeking may not be available to us.
>> As a "no minimum" offering, there is no minimum number of principal
amount of certificates that must be sold. We will receive the proceeds
from the sale of certificates as they are sold.
>> If we fail to maintain our REIT status, we will be taxed as a
corporation, which could adversely affect our ability to make interest
payments to holders of certificates.
>> Conflicts of interest with the underwriter and our advisor in
connection with this offering and our on-going business operations
could affect decisions made by our advisor on our behalf.
>> There is no public trading market for the certificates. A market
likely will not develop after this offering.
>> Fluctuations in interest rates or default in repayment of loans by
borrowers could adversely affect our ability to make interest payments
on and repay certificates as they mature.
CONFLICTS OF INTEREST
A number of potential conflicts exist between us and our advisor and its
principals. These conflicts include:
>> Our President is the President of both our advisor and the underwriter
and thus is in a position of control of both entities.
>> Agreements between us and our advisor and the underwriter were not
negotiated at arm's-length.
>> We and the underwriter have common business interests.
>> Negotiations between us and our advisor during the organization and
structuring of our operations were not at arm's length.
>> The advisory agreement was not negotiated at arm's-length.
>> We share operations facilities with our advisor and the underwriter.
Our advisor and its affiliates may engage in businesses similar to ours. We
compensate our advisor and its affiliates for services rendered and pay an
annual advisory fee equal to 1.25% of average invested assets.
3
OUR INVESTMENT OBJECTIVES
Our investment objectives are to provide our certificate holders with:
>> a higher level of distributable income or interest rate than is
available in guaranteed or government-backed fixed-income investments;
>> preservation of their investment capital through portfolio
diversification (lending funds to many different borrowers and
purchasing bonds issued by numerous issuers);
>> greater security for our portfolio through investment only in
mortgage-backed loans and securities (providing us with collateral in
the event of a borrower's default); and
>> greater security for our certificate holders by our pledging
mortgage-secured promissory notes or debt securities that we hold to
secure our obligations under the certificates (providing certificate
holders with a stream of revenue and potential sale proceeds in the
event of our default).
BUSINESS OBJECTIVES AND POLICIES
We seek to provide cash distributions of current income to our shareholders
through the implementation of our investment and operating strategy. We make
mortgage loans from $100,000 to $2,000,000 to churches and other non-profit
religious organizations throughout the United States. We seek to enhance returns
by:
>> lending at rates of interest in excess of standard commercial and
residential mortgage interest rates;
>> seeking origination fees (i.e. "points") from the borrower at the
outset of a loan and upon any renewal of a loan;
>> making a limited amount of higher-interest rate and increased risk
second mortgage loans and short-term construction loans to qualified
borrowers; and
>> purchasing a limited amount of mortgage-secured debt securities issued
by churches and other non-profit religious organizations, typically at
par value.
Our policies limit the amount of second mortgage loans to 20% of our
average invested assets on the date any second mortgage loan is closed and limit
the amount of mortgage-secured debt securities to 30% of our average invested
assets on the date of their purchase. All other mortgage loans we make are
secured by a first mortgage (or deed of trust). We may make fixed-interest rate
loans having maturities of three to twenty-five years. We may borrow up to 300%
of our shareholders' equity.
LENDING GUIDELINES
We follow specified lending guidelines and criteria in evaluating the
creditworthiness of potential borrowers. These guidelines and criteria include:
>> Loans we make cannot exceed 75% of the appraised value of the real
property and improvements securing the loan.
>> We may not loan more than $2,000,000 to a single borrower.
>> We require appraisals of the property securing our loans.
>> The borrower must furnish us with a mortgagee title policy insuring
our interest in the collateral.
>> The borrower's long-term debt (including the proposed loan) as of the
date of the mortgage loan may not exceed four times the borrower's
gross income for its most recent twelve (12) months.
>> The borrower must furnish us with its reviewed or audited financial
statements for the last two (2) complete fiscal years and financial
statements for the period within ninety (90) days of the loan closing
date.
4
RATIO OF EARNINGS TO FIXED CHARGES
For the Period Ended December 31, Six Month Period
Ended June 30,
2000 2001 2002 2003 2004 2004(1) 2005 2005 (1)
(actual) (pro (actual) (pro forma)
forma)
------------- ------------ ------------ ------------ ----------- ---------- ----------- ------------
------------- ------------ ------------ ------------ ----------- ---------- ----------- ------------
Earnings (Interest $1,208,452 $1,304,845 $1,451,182 $2,106,358 $2,701,872 $3,748,740 $1,473,690 $1,939,774
Income)
Fixed Expenses 68,199 26,835 161,241 805,604 1,103,672 2,150,540 711,374 1,177,458
Ratio of Earnings to 17.72:1 48.62:1 9.00:1 2.61:1 2.45:1 1.74:1 2.07:1 1.65:1
Fixed Charges
(1) Adjusted to reflect the sale of all remaining certificates offered
($15,379,000 as of December 31, 2004 and $12,523,000 as of June 30, 2005)
and assumes a weighted average interest rate of 6.370% per year ($979,642
total as of December 31, 2004 and $398,858 as of June 30, 2005). As of the
offering date, interest rates we will pay on certificates are set forth in
the "Description of the Certificates" section of this prospectus. However,
investors are advised to check for prospectus supplements as interest rates
are subject to change. Further assumes that we derive no income from the
application of certificate sale proceeds to new mortgage loans.
WHO MAY INVEST
You may purchase up to $5,000 of certificates only if you have either (i) a
minimum annual gross income (without regard to your investment in shares or
certificates) of at least $30,000 and a net worth (exclusive of home, home
furnishings and automobiles) of $30,000; or (ii) a net worth (determined with
the foregoing exclusions) of at least $100,000. You may purchase more than
$5,000 of certificates only if you have either: (i) a minimum annual gross
income (without regard to your investment in shares or certificates) of at least
$45,000 and a net worth (exclusive of home, home furnishings and automobiles) of
at least $45,000; or (ii) a net worth (determined with the foregoing exclusions)
of at least $150,000. Suitability standards may be higher in certain states.
Potential investors who are residents of Arizona, Arkansas, Kansas,
Massachusetts, Minnesota, North Dakota, Texas or Washington should read Exhibit
A for suitability requirements particular to their state.
In addition to the above suitability standards, it is recommended that
Kansas investors limit their investment to no more than 10% of their net worth
(exclusive of home, home furnishings and automobiles).
In addition to the above suitability standards, residents of Texas are
limited to investing no more than 10% of their net worth (exclusive of home,
home furnishings and automobiles) in our shares or certificates.
In the case of fiduciary accounts, these minimum standards must be met by
the beneficiary of the fiduciary account or by the donor or grantor who directly
or indirectly supplies the funds to purchase the shares or certificates if the
donor or grantor is the fiduciary.
The account application to be signed by all purchasers of the Series B
Secured Investors Certificates contains an arbitration agreement. By this
agreement, each purchaser agrees that all controversies relating to the
Certificates will be determined by arbitration before the NASD.
5
RISK FACTORS
An investment in our certificates involves various risks. In addition to
the other information set forth in the prospectus, you should consider the
following factors before making a decision to purchase certificates.
This prospectus contains statements of a forward-looking nature relating to
future events or our future performance. These forward-looking statements are
based on our current expectations, assumptions, estimates and projections about
us and our industry. When used in this prospectus, the words "expects,"
"believes," "anticipates," "estimates," "intends," "will" and similar
expressions are intended to identify forward-looking statements. These
statements include, but are not limited to, statements of our plans, strategies
and prospects contained in this prospectus.
These forward-looking statements are only predictions and are subject to
risks and uncertainties that could cause actual events or results to differ
materially from those projected. The cautionary statements made in this
prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this prospectus. We assume no obligation to
update these forward-looking statements publicly for any reason. Actual results
could differ materially from those anticipated in these forward-looking
statements.
Risks Related to Method and Terms of This Offering
This is a Best Efforts Offering. The underwriter's obligation to sell the
certificates requires only its best efforts to locate purchasers on our behalf.
The underwriter is not obligated to purchase any certificates. Less than all of
the certificates offered may be sold. If less than all the certificates offered
are sold, we will have less cash to loan to churches and other non-profit
religious organizations.
This is a No Minimum Offering. The distribution agreement does not require
that a minimum number of certificates be sold before we receive proceeds from
their sale. We will receive proceeds from the sale of certificates when and if
they are sold.
We Will Incur Expenses in this Offering. Expenses incurred in connection
with this offering will reduce our assets that will be available for investment.
Risks Related to Us
Our Failure to Qualify as a Real Estate Investment Trust Could Reduce the
Funds We Have Available For Investment. We operate as a real estate investment
trust. As a REIT, we are allowed a deduction for dividends paid to our
shareholders in computing our taxable income. Thus, only our shareholders are
taxed on our taxable income that we distribute. This treatment substantially
eliminates the "double taxation" of earnings to which most corporations and
their shareholders are subject. Qualification as a REIT involves the application
of highly technical and complex Internal Revenue Code provisions.
To qualify and maintain our status as a REIT, we must meet certain share
ownership, income, asset and distribution tests on a continuing basis. No
assurance can be given that we will satisfy these tests at all times. Further,
the requirements for a REIT may substantially affect day-to-day decision-making
by our advisor. Our advisor may be forced to take action it would not otherwise
take or refrain from action which might otherwise be desirable in order to
maintain our REIT status.
If we fail to qualify as a REIT in any taxable year, then we would be
subject to federal income tax on our taxable income at regular corporate rates
and not be allowed a deduction for distributions to shareholders. We would be
disqualified from treatment as a REIT for the four taxable years following the
year of losing our REIT status. We intend to operate as a REIT. However, future
economic, market, legal, tax or other consequences may cause our board of
directors to revoke the REIT election. Loss of REIT status from either our
disqualification as a REIT or our revocation of REIT status would not affect
whether we may deduct interest paid to certificate holders for United States
federal income tax purposes. To generate funds with which to pay federal income
taxes because of the loss of REIT status, however, could reduce our funds that
are available for investment, could cause us to incur additional indebtedness,
or could cause us to liquidate investments, each of which could affect adversely
our ability to make interest payments to holders of certificates.
Conflicts of Interest Arise From Our Relationship with Our Advisor and the
Underwriter. The terms of transactions involving our formation and the formation
of our advisor, and our contractual relationship with our advisor, were not
negotiated at arm's-length. Our non-independent directors and officers may have
conflicts of interest in enforcing agreements between us and our advisor or the
underwriter. Future business arrangements and agreements between us and our
advisor or the underwriter and their affiliates must be approved by our board of
directors, including a majority of our independent directors.
6
Risks Related to the Certificates
We May Incur More Indebtedness. We may incur additional indebtedness in the
future. We may assign or pledge some of our mortgage-secured promissory notes or
other collateral in connection with incurring this additional indebtedness. Our
ability to incur additional indebtedness is limited to 300% of our Shareholders'
Equity by our bylaws. Once this threshold is reached, we will not be able to
incur additional indebtedness unless we raise additional equity capital. This
limitation could restrict our growth or affect our ability to repay the
certificates as they mature.
There Are Potential Adverse Effects Associated With Lending Borrowed Funds.
We intend to deploy the proceeds from this offering to make loans to churches
and other non-profit religious organizations. We have also used our line of
credit with Beacon Bank, Shorewood, Minnesota to fund loans, and intend to use
our line of credit in this way in the future. Lending borrowed funds is subject
to greater risks than in unleveraged lending. The profit we realize from lending
borrowed funds is largely determined by the difference, or "spread," between the
interest rates we pay on the borrowed funds and the interest rates that our
borrowers pay us. Our spread may be materially and adversely affected by changes
in prevailing interest rates. Furthermore, the financing costs associated with
lending borrowed funds could decrease the effective spread in lending borrowed
funds, which could adversely affect our ability to pay interest on and repay the
certificates as they mature.
Fluctuations In Interest Rates May Affect Our Ability to Sell Certificates.
If the interest rates we offer on certificates become less attractive due to
changes in interest rates for similar investments, our ability to sell
certificates could be adversely affected or certificate holders could choose not
to renew their certificates upon maturity. Since we will rely on the proceeds
from the sales of certificates and renewals of certificates, in part, to pay
maturing certificates, a decline in sales of certificates could adversely affect
our ability to pay your certificate upon maturity. We may change the interest
rates at which we are currently offering certificates in response to
fluctuations in interest rates.
There Is No Public Market for the Certificates. There is no market for the
certificates. It is unlikely that a market will develop. The certificates will
not be listed on any exchange and will not be qualified for quotation on NASDAQ.
In addition, the market for REIT securities historically has been less liquid
than other types of publicly-traded securities. It may be impossible for you to
recoup your investment prior to maturity of the certificates.
There Will Not Be a Sinking Fund, Insurance or Guarantee Associated With
the Certificates. We will not contribute funds to a separate account, commonly
known as a sinking fund, to repay principal or interest on the certificates upon
maturity or default. The certificates are not certificates of deposit or similar
obligations of, or guaranteed by, any depository institution. Further, no
governmental or other entity insures or guarantees payment on the certificates
if we do not have enough funds to make principal or interest payments.
Therefore, if you purchase certificates, you will have to rely on our revenue
from operations, along with the security provided by the collateral for the
certificates, for repayment of principal and interest on the certificates.
The Collateral for the Certificates May Not Be Adequate If We Default. The
certificates will at all times be secured by mortgage-secured promissory notes
and church bonds having an outstanding principal balance equal to at least 100%
of the outstanding principal balance of the certificates. If we default in the
repayment of the certificates, or another event of default occurs, the trustee
will not be able to foreclose on the mortgages securing the promissory notes and
bonds in order to obtain funds to repay certificate holders. Rather, the trustee
will need to look to the revenue stream associated with our borrowers' payments
on or repayment of the promissory notes and bonds or revenue derived from sale
of the promissory notes or bonds to repay certificate holders. If the trustee
chooses to rely on revenues received from our borrowers, certificate holders may
face a delay in payment on certificates in the event of default, as borrowers
will repay their obligations to us in accordance with amortization schedules
associated with their promissory notes or bonds. If the trustee chooses to sell
promissory notes or bonds in the event of our default, the proceeds from the
sales may not be sufficient to repay our obligations on all outstanding or
defaulted certificates.
The Certificates Are Not Negotiable Instruments and Are Subject to
Restrictions on Transfer. The certificates are not negotiable debt instruments.
Rights of record ownership of the certificates may be transferred only with our
advisor's prior written consent. You will not be able to freely transfer the
certificates.
We Are Obligated To Redeem Certificates Only In Limited Circumstances. You
will have no right to require us to prepay or redeem any certificate prior to
its maturity date, except in the case of your death or if we replace our current
advisor. Further, even in the event of your death, we will not be required to
redeem your certificates if we have redeemed at least $25,000 of principal
amount of certificates during the calendar quarter in which your representative
notifies us of your death and requests redemption. We do not intend to redeem
certificates prior to maturity except in the case of death.
7
We May Not Have Sufficient Available Cash to Redeem Certificates If We
Terminate Our Advisory Agreement With Our Current Advisor. We will be required
to offer to redeem all outstanding certificates if we terminate our advisory
agreement with Church Loan Advisors, Inc., our current advisor, for any reason.
If the holders of a significant principal amount of certificates request that we
redeem their certificates, we may be required to sell a portion of our mortgage
loan and church bond portfolio to satisfy the redemption requests. Any such sale
would likely be at a discount to the recorded value of the mortgage loans and
bonds being sold. Further, if we are unable to sell loans or church bonds in our
portfolio, we may be unable to satisfy the redemption obligations.
The Indenture Contains Limited Protection For Holders of Certificates. The
indenture governing the certificates contains only limited events of default
other than our failure to pay principal and interest on the certificates on
time. Further, the indenture provides for only limited protection for holders of
certificates upon a consolidation or merger between us and another entity or the
sale or transfer of all or substantially all of our assets. If we default in the
repayment of the certificates or under the indenture, you will have to rely on
the trustee to exercise your remedies on your behalf. You will not be able to
seek remedies against us directly.
Risks Related to Management
We Are Dependent Upon Our Advisor. Our advisor, Church Loan Advisors, Inc.,
manages us and selects our investments subject to general supervision by our
board of directors and compliance with our lending policies. We depend upon our
advisor and its personnel for most aspects of our business operations. Our
success depends on the success of our advisor in locating borrowers and
negotiating loans upon terms favorable to us. Among others, our advisor performs
the following services for us:
o mortgage loan marketing and procurement o managing relationships with our accountants and
o bond portfolio selection and investment attorneys
o mortgage loan underwriting o corporate management
o mortgage loan servicing o bookkeeping
o money management o reporting to state, federal, tax and other
o developing and maintaining business relationships regulatory authorities
o maintaining "goodwill" o reports to shareholders and shareholder relations
Our shareholders' right to participate in management is generally limited to the
election of directors. Certificate holders will have no right to participate in
our management. You should not purchase certificates unless you are willing to
entrust our management to our advisor and our board of directors.
We Have Conflicts of Interest with Our Advisor and the Underwriter.
Affiliations and conflicts of interests exist among our officers and directors
and the owner and officers and directors of our advisor and the underwriter. Our
President, Philip Myers is the President of our advisor and the underwriter and
thus is in a position of control of both entities. Our President and the
officers and directors of our advisor are involved in the church financing
business through their affiliations with the underwriter. The underwriter
originates, offers and sells first mortgage bonds for churches. We may purchase
first mortgage bonds issued by churches through the underwriter in its capacity
as underwriter for the issuing church, or as broker or dealer on the secondary
market. In such event, the underwriter would receive commissions (paid by the
issuing church) on original issue bonds, or "mark-ups" in connection with any
secondary transactions. If we sell church bonds in our portfolio, the bonds will
be sold through the underwriter. We would pay the underwriter commissions in
connection with such transactions.
Our bylaws limit the amount of all commissions, mark-downs or mark-ups paid
to the underwriter. Our business dealings with our advisor and its affiliates
also must be approved by a majority of our board of directors, including a
majority of our independent directors.
Generally, mortgage loans we originate are smaller than the bond financings
originated by the underwriter. However, there may be circumstances where our
advisor and the underwriter could recommend either type of financing to a
prospective borrower. The decisions of our advisor and the underwriter could
affect the credit quality of our portfolio.
Redemption Obligations Relating to the Certificates May Affect Our Ability
to Replace our Advisor. We will be required to offer to redeem all outstanding
certificates if we terminate our advisory agreement with Church Loan Advisors,
Inc. Our independent directors are required to review and approve the agreement
with our advisor on an annual basis. The redemption provision relating to the
certificates may have the effect of reducing our ability to replace our current
advisor.
8
Risks Related to Mortgage Lending
We Are Subject to the Risks Generally Associated with Mortgage Lending.
Mortgage lending involves various risks, many of which are unpredictable and
beyond our control and foresight. It is not possible to identify all potential
risks associated with mortgage lending. Some of the more common risks
encountered may be summarized as follows:
o low demand for mortgage loans o availability of alternative financing and
competitive conditions
o interest rate fluctuations
o factors affecting specific borrowers
o changes in the level of consumer confidence
o losses associated with default, foreclosure of a
o availability of credit-worthy borrowers mortgage, and sale of the mortgaged property
o national and local economic conditions o state and federal laws and regulations
o demographic and population patterns o bankruptcy or insolvency of a borrower
o zoning regulations
o taxes and tax law changes
Second Mortgage Loans Pose Additional Risks. Our financing policies allow
us to make second mortgage loans. The principal amount of such loans may not
exceed 20% of our average invested assets. Second mortgage loans entail more
risk than first mortgage loans, as foreclosure of senior indebtedness or liens
could require us to pay the senior debt or risk losing our mortgage.
Fixed-Rate Debt Can Result in Yield Fluctuations. Fixed-rate debt
obligations carry certain risks. A general rise in interest rates could make the
yield on a particular mortgage loan lower than prevailing rates. This could
negatively affect our value and consequently the value of the certificates.
Neither we nor our advisor can predict changes in interest rates. We will
attempt to reduce this risk by maintaining medium and longer-term mortgage loans
and through offering adjustable rate loans to borrowers. We do not intend to
borrow funds or sell certificates if the cost of such borrowing exceeds the
income we believe we can earn from lending the funds.
The Mortgage Banking Industry Is Highly Competitive. We compete with a wide
variety of lenders, including banks, savings and loan associations, insurance
companies, pension funds and fraternal organizations for mortgage loans. Many
competitors have greater financial resources, larger staffs and longer operating
histories than we have, and thus may be a more attractive lender to potential
borrowers. We intend to compete by limiting our business "niche" to lending to
churches and other non-profit religious organizations, offering loans with
competitive and flexible terms, and emphasizing our expertise in the specialized
industry segment of lending to churches and other non-profit religious
organizations.
Fluctuations in Interest Rates May Affect Our Ability to Repay the
Certificates. Prevailing market interest rates impact borrower decisions to
obtain new loans or to refinance existing loans, possibly having a negative
effect upon our ability to originate mortgage loans. If interest rates decrease
and the economic advantages of refinancing mortgage loans increase, then
prepayments of higher interest mortgage loans in our portfolio would likely
reduce our portfolio's overall rate of return (yield).
We Are Subject to the Risks Associated with Fluctuations in National and
Local Economic Conditions. The mortgage lending industry is subject to increased
credit risks and rates of foreclosures during economic downturns. In addition,
because we provide mortgages to churches and other religious organizations who
generally receive financing through charitable contributions, our financial
results are subject to fluctuations based on a lack of consumer confidence or a
severe or prolonged national or regional recession. As a result of these and
other circumstances, our potential borrowers may decide to defer or terminate
plans for financing their properties decreasing demand for mortgage loans. In
addition, during such economic times we may be unable to locate as many
credit-worthy borrowers.
Our Business May Be Adversely Affected If Our Borrowers Become Insolvent or
Bankrupt. If any of our borrowers become insolvent or bankrupt, the borrower's
mortgage payments will be delayed and may cease entirely. We may be forced to
foreclose on the mortgage and take legal title to the real estate and incur
expenses related to the foreclosure and disposition of the property.
9
Risks Related to Mortgage Lending to Churches
Churches Rely on Member Contributions to Repay Our Loans. Churches rely on
member contributions for their primary source of income. Member contributions
are used to repay our loans. The membership of a church or the per capita
contributions of its members may not increase or remain constant after a loan is
funded. A decrease in a church's income could result in its inability to pay its
obligation to us, which may affect our ability to pay interest due on or repay
the certificates. We have no control over the financial performance of a
borrowing church after a loan is funded.
Churches Depend Upon Their Senior Pastors. A church's senior pastor usually
plays an important role in the management, spiritual leadership and continued
viability of that church. A senior pastor's absence, resignation or death could
have a negative impact on a church's operations, and thus its continued ability
to generate revenues sufficient to service its obligations to us.
The Limited Use Nature of Church Facilities Limits the Value of Our
Mortgage Collateral. Our loans are secured principally by first mortgages upon
the real estate and improvements owned or to be owned by churches and other
religious and non-profit organizations. Although we will require an appraisal of
the premises as a pre-condition to making a loan, the appraised value of the
premises cannot be relied upon as being the actual amount which might be
obtained in the event of a default by the borrower. The actual liquidation value
of church, school or other institutional premises could be adversely affected
by, among other factors: (i) its limited use nature; (ii) the availability on
the market of similar properties; (iii) the availability and cost of financing,
rehabilitation or renovation to prospective buyers; (iv) the length of time the
seller is willing to hold the property on the market; or (v) the availability in
the area of the mortgaged property of congregations or other buyers willing to
pay the fair value for a church facility.
Expenses of Foreclosure May Prevent Us From Recovering the Full Value of a
Loan. If we foreclose on a mortgage and take legal title to a church's real
estate, real estate taxes could be levied and assessed against the property
since the property would no longer be owned by a non-profit entity. The property
may also incur operating expenses pending its sale, such as property insurance,
security, repairs and maintenance. These expenses would be our financial
responsibility, and could be substantial in relation to our prior loan if we
cannot readily dispose of the property. Such expenses could prevent us from
recovering the full value of a loan in the event of foreclosure.
Risks Related to Environmental Laws
We May Face Liability Under Environmental Laws. Under federal, state and
local laws and regulations, a secured lender (like us) may be liable, under
certain limited circumstances, for the costs of removal or remediation of
certain hazardous or toxic substances and other costs (including government
fines and injuries to persons and adjacent property). Liability may be imposed
whether or not the owner or lender knew of, or was responsible for, the presence
of hazardous or toxic substances. The costs of remediation or removal of
hazardous or toxic substances, or of fines for personal or property damages, may
be substantial and material to our business operations. The presence of
hazardous or toxic substances, or the failure to promptly remediate such
substances, may adversely affect our ability to resell real estate collateral
after foreclosure or could cause us to forego foreclosure. This is a changing
area of the law. The courts have found both in favor and against lender
liability in this area under various factual scenarios.
The Collateral For Our Loans and Our Lenders May Be Subject to
Environmental Claims. If there are environmental problems associated with the
real estate securing any of our loans, the associated remediation or removal
requirements imposed by federal, state and local laws could affect our ability
to realize value on our collateral or our borrower's ability to repay its loan.
Future Changes in Tax Laws May Affect Our REIT Status
In this prospectus, we discuss our tax treatment as a REIT based on
existing provisions of the Internal Revenue Code, existing and proposed
regulations, existing administrative interpretations and existing court
decisions. New legislation, regulations, administrative interpretations or court
decisions may significantly change the tax laws. Therefore, continuing
qualification as a REIT may vary substantially from the treatment we describe in
this prospectus, which may impact the consequences of purchasing certificates.
10
WHO MAY INVEST
Who May Purchase Certificates. You should purchase certificates only if you
are prepared to hold the certificates until maturity, only if you have
significant financial means, and only if you have no immediate need for
liquidity of your investment. We have established financial suitability
standards for investors desiring to purchase certificates. You may purchase up
to $5,000 of certificates only if you have either (i) a minimum annual gross
income (without regard to your investment in shares or certificates) of at least
$30,000 and a net worth (exclusive of home, home furnishings and automobiles) of
$30,000; or (ii) a net worth (determined with the foregoing exclusions) of at
least $100,000. You may purchase more than $5,000 of certificates only if you
have either: (i) a minimum annual gross income of (without regard to your
investment in shares or certificates) at least $45,000 and a net worth
(exclusive of home, home furnishings and automobiles) of $45,000; or (ii) a net
worth (determined with the foregoing exclusions) of at least $150,000.
Suitability standards may be higher in some states. Potential investors who are
residents of Arizona, Arkansas, Kansas, Massachusetts, Minnesota, North Dakota,
Texas or Washington should read Exhibit A for suitability requirements
particular to their state. You must represent in your subscription agreement
that you satisfy any applicable suitability standards.
In addition to the above suitability standards, it is recommended that
Kansas investors limit their investment to no more than 10% of their net worth
(exclusive of home, home furnishings and automobiles).
In addition to the above suitability standards, residents of Texas are
limited to investing no more than 10% of their net worth (exclusive of home,
home furnishings and automobiles) in our certificates.
We may not complete a sale of certificates until five days after you have
received a prospectus. We will refund your investment upon your request, which
we must receive within five days after you subscribe, if you received a
prospectus only at the time of subscription.
Fiduciary Accounts. In the case of fiduciary accounts, these minimum
standards must be met by the beneficiary of the fiduciary account or by the
donor or grantor who directly or indirectly supplies the funds to purchase the
shares or certificates if the donor or grantor is the fiduciary.
11
USE OF PROCEEDS
The following represents our estimate of the use of the offering proceeds
from the sale of the certificates, assuming that all the offered certificates
are sold.
Total Percent
Gross Offering Proceeds (1) $23,000,000 100.00%
Less Expenses
Selling Commissions (2) 800,000 3.48%
Commissions on Renewals (3) 45,000 .20%
Underwriter's Expense Allowance (4) 120,000 .52%
Offering Expenses (5) 100,000 .43%
Total Public Offering-Related Expenses 1,065,000 4.63%
Amount Available for Investment (6) $21,935,000 95.37%
- --------------------------------
(1) We are offering the certificates on a "best efforts" basis through the
underwriter. There is no assurance that any shares or certificates will be
sold.
(2) We will pay the underwriter a sales commission of 3.0% and an underwriting
management fee equal to 1.0% of the principal amount of certificates sold.
(3) We will pay the underwriter a sales commission of up to 1.50% on the
renewal of any of the Series A certificates. An underwriter's management
fee will not be paid on any certificates that are renewed.
(4) We will pay the underwriter a non-accountable expense allowance of up to
$120,000, if all of the certificates are sold, payable as follows: (i)
$20,000 is payable upon the sale of $1,000,000 of certificates; and (ii)
$100,000 is payable ratably as the remaining $19,000,000 of certificates is
sold.
(5) These figures are our best estimates of the legal, accounting, printing,
filing fees and other expenses attendant to this offering, all of which
have been or will be paid to independent professionals and service
providers.
(6) Substantially all of the net proceeds from the sale of certificates will be
used to make mortgage loans to churches and other non-profit religious
organizations and purchase mortgage bonds issued by churches. Some of the
proceeds may be used to pay down our line of credit, redeem our equity
securities and repay maturing certificates. We will use no more that 15% of
the gross proceeds of this offering to pay interest on certificates and
repay principal to certificate holders. Pending application of the proceeds
as outlined above, the net proceeds of this offering will be invested in
permitted temporary investments.
12
COMPENSATION TO ADVISOR AND AFFILIATES
This table discloses all the compensation our advisor and its affiliates
can receive either directly or indirectly. In accordance with applicable state
law, the total of all acquisition fees and expenses we pay in connection with
our business cannot exceed 6% of the amount loaned, unless a majority of the
directors (including a majority of our independent directors) not otherwise
interested in the transaction approve the transaction as being commercially
competitive, fair and reasonable to us. Our total operating expenses cannot (in
the absence of a satisfactory showing to the contrary) in any fiscal year exceed
the greater of: (a) 2% of our average invested assets; or (b) 25% of our net
income for the year. Our independent directors may, upon a finding of unusual
and nonrecurring factors which they deem sufficient, determine that a higher
level of expenses is justified in any given year.
ADVISOR COMPENSATION
ITEM OF RECIPIENT AMOUNT OR METHOD OF COMPENSATION
COMPENSATION
Advisory Fee Advisor 1.25% annually, paid monthly, of our average invested assets. This fee is
reduced to 1.00% on assets from $35 million to $50 million and to .75% on assets
over $50 million. Our advisor received advisory fees in the amount of $154,389
for the year ended December 31, 2000, $162,131 for the year ended December 31,
2001, $172,151 for the year ended December 31, 2002, $269,043 for the year ended
December 31, 2003, $255,290 for the year ended December 31, 2004 and $203,897
for the six months ended June 30, 2005. Assuming all of the certificates are
sold and our average invested assets were $45,000,000, the advisory fee would be
$537,500 per year.
Acquisition Advisor In connection with mortgage loans we make, borrowers may be required to pay our
Fees/Expenses advisor's expenses for closing and other loan-related expenses,
such as accounting fees and appraisal fees paid by our advisor to independent
service providers. Our advisor may retain payments made by the borrower in
excess of costs, but our bylaws limit the total of all acquisition fees and
acquisition expenses to a reasonable amount and in no event in excess of six
percent (6%) of the funds advanced to the borrower.
Advisor Loan Advisor One-half of the origination fees collected from the borrower at closing in
Origination Fee connection with each mortgage loan we make. Our advisor received origination
fees in the amount of $21,250 for the year ended December 31, 2000, $37,297 for
the year ended December 31, 2001, $98,270 for the year ended December 31, 2002,
$275,860 for the year ended December 31, 2003, $188,826 for the year ended
December 31, 2004 and $63,437 for the six months ended June 30, 2005. We cannot
estimate the total amount of loan origination fees that may be realized by our
advisor, but assuming all of the certificates are sold and we invest in that
one-year period net proceeds of $18,980,000 in mortgage loans with an average
origination fee of 3%, the loan origination fees payable to our advisor in such
year would be $284,700. As our loans mature or are otherwise repaid, we may make
new loans to borrowers. Loan origination fees would be payable to our advisor in
connection with these loans.
13
AFFILIATE COMPENSATION
ITEM OF RECIPIENT AMOUNT OR METHOD OF COMPENSATION
COMPENSATION
Commissions on the Sale of Underwriter 3.0% of the principal amount of the certificates. The underwriter may re-allow
Certificates in this Offering all or a portion of this amount to other participating broker-dealers who are
members of the National Association of Securities Dealers, Inc.
Non-Accountable Expense Underwriter Up to $120,000 to cover the underwriter's costs and expenses relating to the
Allowance Relating to the Sale offer and sale of the certificates in this offering, payable as follows: (i)
of Certificates in this Offering $20,000 paid upon the sale of the first $1,000,000 of certificates, and (ii)
$100,000 payable ratably based on the principal amount of the certificates sold
thereafter.
Underwriter's Management Fee Underwriter 1.0% of the principal amount of the certificates, payable only upon original
issuance. We will not pay the underwriter a management fee upon renewal of
certificates.
Commissions and Expenses on Underwriter Customary mark-ups and mark-downs on first mortgage church bonds we purchase and
First Mortgage Bonds Purchased sell through the underwriter on the secondary market, and commissions earned
through the underwriter on church bonds we purchase in the primary market.
Renewal Commissions Underwriter We will pay the underwriter a commission not to exceed 1.5% on the renewal of
each certificate.
14
CONFLICTS OF INTEREST
We are subject to various conflicts of interest arising from our
relationship with our advisor and the underwriter. Our President is the
President of both our advisor and the underwriter and thus is in a position of
control of both entities. Our advisor, its affiliates, our directors and the
directors of our advisor are not restricted from engaging for their own accounts
in business activities similar to ours. Occasions may arise when our interests
would be in conflict with those of one or more of the directors, our advisor or
their affiliates. Our directors, a majority of whom are independent, will
endeavor to exercise their fiduciary duties in a manner that will preserve and
protect our rights and the interests of the shareholders in the event any
conflicts of interest arise. Any transactions between us and any director, our
advisor or any of their affiliates, other than the purchase or sale, in the
ordinary course of our business, of church bonds from or through the
underwriter, will require the approval of a majority of the directors who are
not interested in the transaction.
Transactions with Affiliates and Related Parties
We compensate our advisor and its affiliates for services they provide to
us. Our board of directors has the responsibility to ensure that such services
are provided on terms no less favorable than we could obtain from unrelated
persons or entities. The underwriter may receive commissions from our
transactions in church bonds.
Compensation to Our Advisor and Conflicts of Interest
We pay our advisor an annual advisory fee equal to a 1.25% of our average
invested assets. This fee is reduced to 1.0% on assets from $35 million to $50
million and to .75% on assets over $50 million. The fee is not dependent on our
advisor's performance. Our advisor receives fees when we make or renew a
mortgage loan based upon a percentage of the amount paid by a mortgage borrower
as "points," or origination fees. Accordingly, a conflict of interest could
arise since the retention, acquisition or disposition of a particular loan could
be advantageous to our advisor, but detrimental to us, or vice-versa. Because
origination fees are payable upon the closing of the loan or its renewal, and
the amount is dependent upon the size of the mortgage loan, our advisor may have
a conflict of interest in negotiating the terms of the loan and in determining
the appropriate amount of indebtedness to be incurred by the borrower.
We and our advisor believe that it would not be possible, as a practical
matter, to eliminate these potential conflicts of interest. However, the
advisory agreement must be renewed annually by the affirmative vote of a
majority of the independent directors. The independent directors may determine
not to renew the advisory agreement if they determine that our advisor is not
satisfactorily performing its duties. In connection with the performance of
their fiduciary responsibilities, the existence of possible conflicts of
interest will be one of the factors for the directors to consider in determining
the action we will take.
Compensation to the Underwriter and Conflicts of Interest
We will pay the underwriter commissions based on the gross amount and
maturities of the certificates it sells on our behalf in this offering. A
conflict of interest could arise from this compensation arrangement, as the
underwriter may be incented to sell certificates at a time when we may not be
able to immediately deploy the resulting proceeds to fund mortgage loans or
purchase church bonds.
Our Affiliates May Compete with Us
Any of our directors or officers may have personal business interests that
conflict with our interests and may engage in the church lending business or any
other business. A director or officer may have an interest in an entity we
engage to render advice or services, and may receive compensation from such
entity in addition to compensation received from us.
The underwriter provides financing to churches and other not-for-profit
religious organizations. Therefore, a conflict could arise if the underwriter
were to pursue and secure a lending opportunity otherwise available to us.
However, the average size of first mortgage bond financings undertaken by the
underwriter is approximately $1.75 million, with $1,000,000 being its stated
(but not required) minimum financing. We focus on financings ranging from
$100,000 to $1,000,000 in size. Conflicts of interest between the underwriter
and us likely will be reduced by virtue of the targeted size of loans pursued by
each. We have agreed with the underwriter that financing prospects of less than
$1,000,000 will be first directed to us for consideration. If we determine that
the loan is not suitable or decline to make the loan for any reason, or if the
prospective borrower independently declines to accept our lending, then the
underwriter or its affiliates will have the opportunity to provide financing to
that prospective borrower.
15
The underwriter conducted the first mortgage bond offerings for the
churches owning the three properties on which we hold second mortgages. If a
default were to occur on any of our second mortgage loans or the first mortgage
bonds secured by the properties securing or second mortgages, our interests may
be in conflict with those of the underwriter or its affiliates.
Neither our advisor nor its affiliates are prohibited from providing the
same services to others, including competitors. These relationships may produce
conflicts in our advisor's and its affiliates' allocation of time and resources
among various projects.
Non Arm's-Length Agreements
Many agreements and arrangements we have with our advisor and its
affiliates, including those relating to compensation, were not negotiated at
arm's-length. The conflicts or potential conflicts arising from these agreements
and arrangements will be mitigated by the following factors: (i) our Bylaws
limit our operating expenses to an amount that does not exceed the greater of 2%
of our average invested assets or 25% of our net income unless the independent
directors approve a higher amount and disclose the justification for the higher
expenses to our investors; (ii) our advisor intends to structure its business
relationships so as to be competitive with other programs in the marketplace;
and (iii) the agreements and arrangements are subject to approval by a majority
of our independent directors.
Lack of Separate Legal Representation
We are represented by the law firm of Winthrop & Weinstine, P.A.,
Minneapolis, Minnesota, which has also acted and will continue to act as counsel
to the underwriter, our advisor, our affiliates, and various affiliates of our
advisor with respect to other matters.
Shared Operations Facilities
We are located in the leased offices of the underwriter, American Investors
Group, Inc., in Minnetonka (Minneapolis), Minnesota. We expect to continue to be
housed in these or similar leased premises along with the underwriter and its
affiliates. We are not separately charged for rent or related expenses. Our
advisor incurs our occupancy expense and many of our operating expenses in
exchange for the advisory fee.
DISTRIBUTIONS
In order to qualify for the beneficial tax treatment afforded real estate
investment trusts by the Internal Revenue Code, we are required to pay dividends
in annual amounts which are equal to at least 90% of our "real estate investment
trust taxable income." We intend to make distributions that meet this
requirement. Annual distributions will be estimated for the first three quarters
of each fiscal year and adjusted annually based upon our audited year-end
financial report.
Investors who purchase certificates in this offering will not be entitled
to receive dividends from us as they will not own any of our common stock.
We began making regular quarterly distributions to our shareholders for the
period of operations ended June 30, 1996. Distributions to date, and the
annualized effective yield represented by such distributions (assuming shares
you own were purchased for $10.00 per share) are as follows:
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
Dollar Amount Annualized Yield
Distribution Distributed Per Share
For Quarter Ended: Date: Per Share(2): Represented (3):
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 1996 July 31, 1996 0.1927 (1) 9.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 1996 October 30, 1996 0.23125 9.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 1996 January 31, 1997 0.240625 9.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 1997 April 30, 1997 0.225 9.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 1997 July 31, 1997 0.22875 9.15%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 1997 October 30, 1997 0.2375 9.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 1997 January 31, 1998 0.25625 10.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 1998 April 30, 1998 0.23125 9.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 1998 July 31, 1998 0.23125 9.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
16
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 1998 October 30, 1998 0.2125 8.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 1998 January 31, 1999 0.215625 8.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 1999 April 30, 1999 0.1875 7.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 1999 July 31, 1999 0.21875 8.75%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 1999 October 30, 1999 0.228125 9.125%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 1999 January 31, 2000 0.215625 8.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2000 April 30, 2000 0.20 8.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2000 July 31, 2000 0.1875 7.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 2000 October 31, 2000 0.2125 8.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 2000 January 31, 2001 0.225 9.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2001 April 30, 2001 0.2125 8.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2001 July 31, 2001 0.225 9.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 2001 October 30, 2001 0.20 8.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 2001 January 31, 2002 0.19375 7.75%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2002 April 30, 2002 0.20625 8.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2002 July 31, 2002 0.209375 8.375%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 2002 October 31, 2002 0.1875 7.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 2002 January 31, 2003 0.165625 6.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2003 April 30, 2003 0.165625 6.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2003 July 31, 2003 0.1625 6.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 2003 October 31, 2003 0.1531255 6.125%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 2003 January 31, 2004 0.16875 6.75%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2004 April 30, 2004 0.1625 6.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2004 July 31, 2004 0.153125 6.125%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 2004 October 29, 2004 0.165625 6.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 2004 January 31, 2005 0.1875 7.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2005 April 30, 2005 0.1750 7.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2005 July 29, 2005 0.1625 6.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
(1) Represents a 75 day operating period (April 15 to June 30, 1996).
(2) Distributions for the first three quarters of a year may exceed accumulated
earnings and profits at such date. However, the annual cumulative dividends
for each year are not intended to exceed annual earnings and profits.
(3) Annualized yield for shares purchased for $10.00 per share.
We terminated our dividend reinvestment plan on July 1, 2004.
17
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2004
and June 30, 2005 and as of December 31, 2004 and June 30, 2005 as adjusted to
give effect to sale of all of the certificates offered hereby.
December 31, 2004 December 31, 2004 June 30, 2005 June 30, 2005
Actual As Adjusted Actual As Adjusted
Long Term Debt $ 17,864,000 $ 33,243,000 $ 19,929,000 $ 32,452,000
Current Liabilities 1,897,903 1,897,903 2,414,129 2,414,129
Deferred Income 575,909 575,909 588,220 588,220
Shareholder's Equity Common Stock, $.01 par value per share; 30,000,000 shares
authorized; issued and outstanding 2,551,568 shares at December 31, 2004 and
June 30, 2005
25,516 25,516 25,516 25,516
Additional Paid-In Capital 23,416,468 23,416,468 23,416,468 23,416,468
Accumulated Deficit (725,062) (725,062) (823,902) (823,902)
Total Shareholder's Equity 22,716,922 22,716,922 22,618,082 22,618,082
Total Capitalization $ 43,054,734 $ 58,433,734 $ 45,549,431 $ 58,072,431
18
SELECTED FINANCIAL DATA
The selected financial data presented below is derived from our audited
financial statements at and for the years ended December 31, 2000, 2001, 2002,
2003 and 2004. The selected financial data is from our unaudited financial
statement at and for the six months ended June 30, 2005. The financial
statements are included in the appendix. You should refer to the financial
statements, and notes thereto, for a more detailed presentation of financial
information.
Year Ended December 31,
----------------------------------------------------------------------------- Six Months
------------- ------------ ----------- ------------ ------------ Ended
June 30,
2000 2001 2002 2003 2004 2005
------------- ------------ ----------- ------------ ------------ ------------
Statement of Operations Data
Revenues
Interest Income Loans $1,160,113 $1,247,261 $1,338,459 $1,906,051 $2,364,721 $1,408,367
Interest Income Other 219,857 243,504 389,416 447,733 606,744 363,069
Capital Gains Realized 1,293 5,839 7,208 34,207 14,467 4,719
Origination Income 25,223 27,071 49,543 71,204 166,496 57,613
Income Other Sources 928 1,887 817 59 676 -0-
---------- --------- --------- --------- --------- ---------
Total Revenues 1,407,414 1,525,562 1,785,443 2,459,254 3,153,104 1,833,768
Operating Expenses
Professional Fees 21,241 20,606 29,187 37,273 50,856 20,661
Director Fees 3,200 3,200 3,800 3,800 5,800 2,800
Amortization 2,917 - 0 - 29,874 113,466 174,143 89,171
Advisory Fees 154,389 162,131 172,151 269,043 255,290 203,897
Other 20,132 34,780 141,840 42,780 139,286 132,720
---------- ------- -------- ------- ------- -------
Total Operating Expenses 201,879 220,717 376,852 466,362 625,375 449,249
Interest Expense 65,282 26,835 118,650 692,138 929,529 622,203
Benefit From Income Taxes -0- -0- -0- -0- -0- -0-
---------- ------- --------- -------- ------- -------
Net Income $1,140,253 $1,278,010 $1,289,941 $1,300,754 $1,598,200 $ 762,316
========= ========= ========= ========= ========= =======
Income per Common Share $ .81 $ .80 $ .66 $ .55 $ .63 $ .30
Weighted Average Common
Shares Outstanding 1,414,275 1,593,568 1,964,428 2,345,604 2,522,852 2,551,568
Dividends Declared $1,164,973 $1,324,091 $1,496,369 $1,524,061 $1,692,412 $ 861,156
Dividends Declared per Share $ .825 $ .83125 $ .76875 $ .64975 $ .67083 $ .3375
Year Ended December 31,
----------------------------------------------------------------------------- Six Months
------------- ------------ ----------- ------------ ------------ Ended
June 30,
2000 2001 2002 2003 2004 2005
------------- ------------ ----------- ------------ ------------ ------------
Balance Sheet Data:
Assets:
Cash and Cash Equivalents $ 213,084 $ 1, 256,556 $7,852,220 $4,368,769 $ 2,183,735 $ 1,442,982
Current maturities of loans
receivable 276,565 298,921 290,759 919,859 645,338 578,124
Current maturities of bond - 0 - - 0 - 47,000 54,000 50,000 80,000
portfolio
Loans Receivable, net of
current maturities 11,463,484 11,724,272 16,140,961 25,383,192 30,630,292 32,335,328
Bonds Receivable 2,289,962 3,162,511 4,309,637 5,431,286 8,448,001 9,558,384
Accounts Receivable 9,892 58,008 63,602 61,423 59,844 127,017
Interest Receivable 15,651 66,236 94,385 135,648 139,809 146,894
Prepaid Expense 9,110 - 0 - - 0 - - 0 - - 0 - 9,386
Real Estate Held for Sale - 0 - - 0 - - 0 - 156,352 105,000 444,095
Deferred Offering Costs - 0 - 56,587 377,174 568,458 732,715 767,221
Deferred Tax Asset 60,000 60,000 60,000 60,000 60,000 60,000
---------- ---------- ---------- --------- ---------- ----------
Total Assets $14,337,748 $16,683,091 $29,235,738 $37,138,987 $43,054,734 $45,549,431
========== ========== ========== ========== ========== ==========
Liabilities and Shareholder's
Equity
Account Payable $ 116,997 $ 4,350 $ 39,690 $ 17,296 $ 23,278 $ 238,896
Secured Investor Certificates - - 0 - 7.428.000 14,257,000 19,185,000 21,627,000
0 -
Note payable, line of credit 399,653 - 0 - - 0 - - 0 - - 0 - - 0 -
Mortgage Loan Commitment - 0 - - 0 - 1,243,827 - 0 - 37,726 31,610
Deferred Income 213,059 260,942 364,969 588,303 613,388 619,212
Dividends Payable 293,629 344,504 361,941 411,481 478,420 414,631
Shareholder's Equity 13,314,410 16,073,295 19,797,311 21,864,907 22,716,922 22,618,082
---------- ---------- ---------- ---------- ---------- ----------
$14,337,748 $16,683,091 $29,235,738 $37,138,987 $43,054,734 $45,549,431
========== ========== ========== ========== ========== ----------
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis
The following discussion regarding our financial statements should be read
in conjunction with the financial statements and notes thereto included in this
prospectus beginning at page F-1. We commenced operations as a real estate
investment trust in 1996, specializing in providing mortgage loans to churches
and other religious non-profit organizations.
Financial Condition
During the six months ended June 30, 2005 and the year ended December 31,
2004 our total assets increased by $2,494,697 and $5,915,747, respectively due
primarily to sale of our secured investor certificates in our fifth "best
efforts" public offering. Our total liabilities increased by $2,593,537 and
$5,063,732 at June 30, 2005 and December 31, 2004, respectively due primarily to
the issuance of our secured investor certificates.
Since our inception, we experienced our highest quarterly dividend payment
for the quarter ended December 31, 1997 and our lowest quarterly dividend
payment for the quarter ended September 30, 2003 and June 30, 2004. The
quarterly dividend paid for each share held of record on December 31, 1997 was
$.25625 per share representing an annualized yield of 10.25% for each share
purchased at $10 per share. The quarterly dividend payment for each share held
of record on September 30, 2003 and June 30, 2004 was $.153125 representing an
annualized yield of 6.125% for each share purchased at $10 per share. The
dividend payment for December 31, 1997 was significantly higher than the average
dividend amount due to the large number of loans funded during the quarter and a
corresponding high level of origination income earned during the quarter. Each
loan funded during the quarter generates origination income which is due and
payable to shareholders as "Taxable Income" even though origination income was
not recognized in its entirety for the period under generally accepted
accounting principals in the United States of America ("GAAP"). Recognition of
origination income under GAAP must be deferred over the expected life of each
loan. By way of further comparison, the dividend payment made to September 30,
2003 and June 30, 2004 shareholders of record was significantly lower than the
average dividend amount due directly to large cash balances we received from our
fourth public offering of stock and secured investor certificates and held in
money market instruments pending deployment into new loans to churches. Because
interest earned in our money market account at current yields is substantially
lower than interest earned on our mortgage loans, interest income earned was
lower than is anticipated to be earned once the offering proceeds are fully
deployed into new loans.
Results of Operations - June 30, 2005
Net income for the Company's six-month periods ended June 30, 2005 and 2004
was $762,316 and $745,653 on total revenues of $1,833,768 and $1,513,227
respectively. Interest income earned on our portfolio of loans was $1,408,367
and $1,140,388 for the six-month periods ended June 30, 2005 and 2004
respectively. The increase was due to the funding of additional mortgage loans.
Interest expense was $622,203 and $437,725 for the six-month periods ended June
30, 2005 and 2004 respectively. The increase was due to the sale of additional
secured investor certificates. We have elected to operate as a real estate
investment trust, therefore we distribute to shareholders at least 90% of
"Taxable Income." The dividends declared and paid to Shareholders for the
quarter ended June 30, 2005 may include loan origination income even though it
is not recognized in its entirety for the period in which received under GAAP.
As of June 30, 2005 and 2004, we had origination revenue of $63,437 and $43,991
during the six months ended June 30, 2005 and 2004, respectively. Net income for
the Company's three-month periods ended June 30, 2005 and 2004 was $379,378 and
$375,825 on total revenues of $936,642 and $770,486 respectively. Interest
income earned on our portfolio of loans was $712,887 and $582,190 for the
three-month periods ended June 30, 2005 and 2004 respectively. The increase was
due to the funding of additional mortgage loans and purchase of additional
mortgage bonds issued by churches. Interest expense was $324,266 and $221,055
for the three-month periods ended June 30, 2005 and 2004 respectively. The
increase was due to the sale of additional secured investor certificates.
Our Board of Directors declared dividends of $.1625 for each share held of
record on June 30, 2005. The dividend, which was paid July 29, 2005 represents a
6.50% annual rate of return on each share of common stock owned and purchased
for $10 per share. Our liabilities at the end of the six-month period ended June
30, 2005 are primarily comprised of dividends declared as of June 30, 2005 but
not yet paid, accounts payable and our secured investor certificates.
Results of Operations - 2004
Net income for our fiscal year ended December 31, 2004 was $1,598,200 on
total revenues of $3,153,104 compared to $1,300,754 on total revenues of
$2,459,254 for the year ended December 31, 2003. Interest income earned on the
Company's portfolio of loans was $2,364,721 for the year ended December 31,
2004, compared to $1,906,051 for 2003. This increase was
20
due to the fact that 24 new loans were originated in fiscal year ended December
31, 2004. Excluded from revenue for the year ended December 31, 2004 is $183,651
of origination income, or "points," we received. Recognition of origination
income under "GAAP" must be deferred over the expected life of each loan.
However, under tax principles, origination income is recognized in the period
received. Accordingly, because our status as a real estate investment trust
requires, among other things, the distribution to Shareholders of at least 90%
of "Taxable Income," the dividends declared and paid to our Shareholders for the
quarters ended March 31, 2004, June 30, 2004, September 30, 2004 and December
31, 2004 included origination income even though it was not recognized in its
entirety as income for the period under GAAP. Our operating expenses for our
fiscal year ended December 31, 2004 were $625,375 compared to $466,362 for our
fiscal year ended December 31, 2003.
Our Board of Directors declared dividends of $.1625 for each share of
record on March 31, 2004, $.153125 for each share held of record on June 30,
2004, $.165625 for each share held of record September 30, 2004 and $.1875 for
each share held of record on December 31, 2004. Based on the four quarters ended
March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004, the
dividends paid represented an 6.50%, 6.125%, 6.625% and 7.50 % annualized yield
to shareholders, respectively, for an effective overall annual yield of 6.6875%
in 2004. In 2004, and especially in the second quarter of 2004, our dividend
yield was significantly lower than in prior periods. This decrease results in
part from the large cash balances we received from our public offerings of
common stock and secured investor certificates, which were held in money market
instruments pending deployment in new loans. Because interest earned in our
money market account is substantially lower than interest earned on our mortgage
loans, interest income earned was lower than in prior periods. Dividend yields
in 2004 were also largely influenced by the prepayment by churches of older
higher interest rate loans in our portfolio, and the funding of numerous new
loans at interest rates significantly lower than those funded in earlier years.
Results of Operations - 2003
Net income for our fiscal year ended December 31, 2003 was $1,300,754 on
total revenues of $2,459,254 compared to $1,289,941 on total revenues of
$1,785,443 for the year ended December 31, 2002. Interest income earned on the
Company's portfolio of loans was $1,906,051 for the year ended December 31,
2003, compared to $1,338,459 for 2002. This increase was due to the fact that 26
new loans were originated in fiscal year ended December 31, 2003. Excluded from
revenue for the year ended December 31, 2003 is $286,836 of origination income
we received. However, under tax principles, origination income is recognized in
the period received. Accordingly, because our status as a real estate investment
trust requires, among other things, the distribution to Shareholders of at least
90% of "Taxable Income," the dividends declared and paid to our shareholders for
the quarters ended March 31, 2003, June 30, 2003, September 30, 2003 and
December 31, 2003 included origination income even though it was not recognized
in its entirety as income for the period under GAAP. Our operating expenses for
our fiscal year ended December 31, 2003 were $466,362 compared to $376,852 for
our fiscal year ended December 31, 2002.
Our Board of Directors declared dividends of $.165625 for each share of
record on March 31, 2003, $.1625 for each shares held of record on June 30,
2003, $.153125 for each shares held of record September 30, 2003 and $.16875 for
each share held of record on December 31, 2003. Based on the four quarters ended
March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003, the
dividends paid represented an 6.625%, 6.50%, 6.125% and 6.75% annualized yield
to shareholders, respectively, for an effective overall annual yield of 6.50% in
2003. In 2003, and especially in the third quarter of 2003, our dividend yield
was significantly lower than in prior periods. This decrease resulted primarily
from the large cash balances we received from our public offering of common
stock and Secured Investor Certificates, which were held in money market
instruments pending deployment into new loans. Because interest earned in our
money market account was substantially lower than interest earned on our
mortgage loans, interest income earned on a per share basis was lower than in
prior periods.
Results of Operations - 2002
Net income for our fiscal year ended December 31, 2002 was $1,289,941 on
total revenues of $1,785,443 compared to $1,278,010 on total revenues of
$1,525,562 for the year ended December 31, 2001. Interest income earned on the
Company's portfolio of loans was $1,785,443 for the year ended December 31,
2002, compared to $1,525,562 for 2001. This increase was due to the fact that 16
new loans were originated in fiscal year ended December 31, 2002. Excluded from
revenue for the year ended December 31, 2002 is $151,485 of origination income
we received. As previously noted, recognition of origination income under GAAP
must be deferred over the expected life of each loan.
Our Board of Directors declared dividends of $.20625 for each share of
record on March 31, 2002, $.209375 for each shares held of record on June 30,
2002, $.1875 for each shares held of record September 30, 2002 and $.165625 for
each share held of record on December 31, 2002. Based on the four quarters ended
March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, the
dividends paid represented an 8.25%, 8.375%, 7.50% and 6.625% annualized yield
21
to shareholders, respectively, for an effective overall annual yield of 7.6875%
in 2002. In 2002, and especially in the last quarter of 2002, our dividend yield
was significantly lower than in prior periods. This decrease resulted primarily
from the large cash balances we received from our public offering of common
stock and Secured Investor Certificates, which were held in money market
instruments pending deployment into new loans. Because interest earned in our
money market account was substantially lower than interest earned on our
mortgage loans, interest income earned on a per share basis was lower than in
prior periods.
Liquidity and Capital Resources
Our revenue is derived principally from interest income, and secondarily,
from origination fees and renewal fees generated by mortgage loans that we make.
We also earn income through interest on funds that are invested pending their
use in funding mortgage loans or distributions of dividends to our shareholders,
and on income generated on church bonds we may purchase and own. We generate
revenue through (i) permitted temporary investments of the net proceeds from the
sale of the shares, and (ii) implementation of our business plan of making
mortgage loans to churches and other non-profit religious organizations. Our
principal expenses are advisory fees, legal and accounting fees, communications
costs with our shareholders, and the expenses of our stock transfer agent,
registrar and dividend reinvestment agent.
In addition, we are able to borrow funds in an amount not to exceed 300% of
Shareholders' Equity in order to increase our lending capacity. We currently
have a $2,000,000 secured line of credit with Beacon Bank, Shorewood, Minnesota.
As of June 30, 2005 we have no outstanding balance against our line of credit.
This credit line is secured by the pledge of $2,000,000 in principal amount of
our Church Bonds. Interest on our line of credit is payable to Beacon Bank on a
monthly basis. We believe that the rate at which we lend funds will always be
higher than the cost at which we borrow the funds (currently our rate at which
we can borrow funds is the prime interest rate plus 1/2% totaling 6.75%).
However, there can be no assurance that we can loan funds out at rates higher
than the rate at which we borrow the funds. We anticipate to "pay-down" any
future borrowings on our line of credit by (i) selling additional securities in
our public offering; (ii) applying the proceeds from principal payments on our
current loan portfolio payments and any loan re-payments. Increases or decreases
in the prime lending rate as well as the increase or decrease in the rate of
interest charged on our loans has and likely will continue to impact interest
income we will earn and, accordingly, influence dividends declared by our Board
of Directors.
Our registration statement to sell to the public 1,500,000 shares of our
common stock at $10 per share ($15,000,000) and to sell to the public
$15,000,000 of debt securities, which we call "Secured Investor Certificates"
terminated in May 2004. In this offering we raised $7,180,440 through the sale
of shares and $15,000,000 through the sale of Secured Investor Certificates. Our
future capital needs over the next three to five years are expected to be met by
(i) this public offering; (ii) the repayment of existing loans; and (iii)
borrowing under our line of credit.
We may borrow funds up to an amount that equals 300% of Shareholders'
Equity. The objective of our current offering of certificates is to raise
intermediate term funds that we can deploy into new loans at rates that provide
a positive spread. This additional loan development will further diversify our
loan portfolio while generating origination income to the advantage to our
shareholders. The cost of this capital is expected to be lower than if borrowed
directly from banks at variable rates of interest.
Critical Accounting Policies and Estimates
Preparation of our financial statements requires estimates and judgments to
be made that affect the amounts of assets, liabilities, revenues and expenses
reported. Such decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting
estimates. We evaluate these estimates based on assumptions we believe to be
reasonable under the circumstances.
The difficulty in applying these policies arises from the assumptions,
estimates and judgments that have to be made currently about matters that are
inherently uncertain, such as future economic conditions, operating results and
valuations as well as management intentions. As the difficulty increases, the
level of precision decreases, meaning that actual results can and probably will
be different from those currently estimated.
Of our significant accounting policies, described in the notes to our
financial statements included herewith, we believe that the estimation of fair
value of our mortgage loans receivable and bond portfolio involve a high degree
of judgment. We estimate the fair value of our mortgage loans receivable to be
the same as the carrying value because of the substantial activity/turnover in
this portfolio. We estimate the fair value of the bond portfolio to be the same
as the carrying value because, there is no ready public market for these bonds.
We do not consider future cash flows, the interest rate or the yield rate of a
loan or bond in estimating fair value. We do not consider the availability of a
market for a loan or bond in estimating fair value.
22
We follow a loan loss reserve policy on our portfolio of loans outstanding.
This critical policy requires complex judgments and the need to make estimates
of future events, which may or may not materialize as planned. This policy
reserves for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan. Our policy will
reserve for the outstanding principal amount of a loan in our portfolio if the
amount is in doubt of being collected.
Listed below is our current loan loss reserve policy:
--------------- ------------------------ ------------------------------------------------------------------------------
Incident Percentage of Loan Status of Loan
Reserved
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
1. None Loan is current, no
interruption in payments during
history of the loan,
("interruption" means receipt
by us more than 30 days after
scheduled payment date).
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
2. None Loan current, previous interruptions experienced, but none in the last six
month period.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
3. None Loan current, previous interruptions experienced, but none in the last 90
day period.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
4. 1.00% Loan serviced regularly, but 2 or 3 payments cumulative in arrears.
Delinquency notice been sent.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
5. 2.00% Loan serviced regularly, but 4 or 5 payments cumulative in arrears.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
6. 5.00% Loan more than 5 payments cumulative in arrears, loan servicing intermittent
during the last 90 days. Ability of obligor to continue to service the loan
at scheduled levels in doubt. Restructuring contemplated or imminent.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
7. The Greater Of: (i) Loan is declared to be in default. Foreclosure proceeding underway or
Accumulate reserve imminent. Reserve amount dependent on value of collateral. All expenses
during default period related to enforcing loan agreements are expensed.
equal to principal
loan balance in excess
of 65% of original
collateral value; or
(ii) 1% of the
remaining principal
balance each quarter
during which the
default remains in
effect
--------------- ------------------------ ------------------------------------------------------------------------------
As of June 30, 2005, we have reserved $117,786 for seven first mortgage
loans that are three or more mortgage payments in arrears. Of these seven loans
(i) one loan has been foreclosed; (ii) two loans are in the process of being
foreclosed; (iii) two are following an approved repayment plan; (iv) one loan
has re-paid their balance in full; and (v) we are working with one loan to
establish a repayment plan.
The remaining $37,432 of the total loan reserve amount is for five first
mortgage loans that are performing but have missed one or two payments since
January 1, 2005. We strive to continually work with our problem loans to rectify
their payment history problems by offering incentives such as waiving late
interest fees if the Church can make up their payment arrearage through a
payment plan. Some problem loans have switched to interest only payments for a
period of six to twelve months to help reduce their expenses since they are
experiencing a temporary shortfall in their tithes and offerings. In most
instances, this has rectified the Church payment problem and the Church is
grateful for our understanding and acceptance of an alternate payment plan.
However, we have foreclosed on two properties since our inception.
Foreclosure brings on additional costs including attorney fees, court costs,
realtor fees and costs to secure and maintain the integrity of the collateral
and protect it from arson and vandalism. In addition, when we obtain property
through foreclosure, the local city and county government immediately revoke the
tax exempt status of the property as a not-for-profit religious organization and
we must now pay real-estate taxes on the acquired property.
We will continue to perform our duties in a diligent and fiduciary manner.
We will enforce our loan loss reserve policy, avoid foreclosure if at all
possible, and openly discuss our loan loss reserve policy with our loan
committee, our board of directors and keep our investors properly informed.
Loan loss reserves are recorded on a quarterly basis.
23
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to changes in interest rate as a result of borrowing
activities used to fund operations and to make mortgage loans and as a result of
the interest income received on the mortgage loans that we make. We borrow using
both floating interest rate lines of credit and fixed rate notes payable. We
primarily use medium-term and long-term (five to fifteen years) debt as a source
of capital. We do not currently use derivative securities, interest-rate swaps
or any other type of hedging activity to manage our costs of capital.
At June 30, 2005, we had no debt outstanding under our credit facilities
and $21,627,000 of fixed rate notes payable. The floating interest rate on the
line of credit is based upon the prime interest rate plus 1/2% totaling 6.75%. A
hypothetical one-percent change in the prevailing prime rate would not have
affected our net income as there was currently no outstanding balance on our
variable rate line of credit. The weighted average interest rate as of June 30,
2005 on our fixed rate notes payable was 6.32%.
24
OUR BUSINESS
General
American Church Mortgage Company was established by American Investors
Group, Inc. (the "underwriter" or "American") to service demand that American
identified through the course of its business for mortgage lending to borrowers
in the amount of $100,000 to $2,000,000. Because of the regulatory and
administrative expenses associated with bond financing, the economic feasibility
of bond financing diminishes for financings under $750,000. As a result,
American believed that many churches were forced to either forego the project
for which their financing request was made, fund their project from cash flow
over a period of time and at greater expense, or seek bank financing on terms
which were not always favorable or available to them. We were incorporated in
Minnesota on May 27, 1994 to provide a lending source to this segment of the
industry, capitalizing on a lack of significant competition in the specialized
business of making smaller church loans, the experienced human resources
available at American and our advisor, and the marketing, advertising and
general goodwill of American. We began making loans in April 1996.
We make loans throughout the United States in principal amounts limited in
range from $100,000 to $2,000,000. We may invest up to 30% of our average
invested assets in mortgage-secured debt securities (bonds) issued by churches
and other non-profit religious organizations. We intend to lend funds and
acquire mortgage secured investments pursuant to our business plan as additional
funds become available from this offering, and thereafter as funds from loan
repayments, bond maturities and other resources become available.
We utilize American's unique specialization in procuring, qualifying and
servicing church loans to enhance our operations. American has underwritten
first mortgage bonds for churches throughout the United States since 1987. In
underwriting church bonds, American reviews financing applications, analyzes
prospective borrowers' financial capability, and structures, markets and sells,
mortgage-backed bond securities to the investing public. Since its inception,
American has underwritten approximately 212 church bond financings, in which
approximately $408,367,000 in first mortgage bonds have been sold to public
investors. The average size of church bond financings underwritten by American
since its inception is approximately $1,926,259.
Financing Business
We make first mortgage loans in amounts ranging from $100,000 to
$2,000,000, to churches and other non-profit religious organizations, and invest
in mortgage-secured debt instruments issued by churches and other non-profit
religious organizations, called church bonds. We apply essentially all of our
working capital (after adequate reserves determined by our advisor) toward
making mortgage loans and investing in church bonds. We seek to enhance returns
on investments by:
o offering competitively attractive mid-term (5-15 years) loans and
long-term (20-25 year) loans (although there is no limit on the term
of our loans);
o seeking origination fees, or "points," from the borrower at the outset
of a loan and upon any renewal of a loan;
o making a limited amount of higher-interest rate second mortgage loans
and construction loans to qualified borrowers; and
o purchasing a limited amount of church bonds, typically at a discount
from par value.
Our policies limit the amount of second mortgage loans to 20% of our
average invested assets on the date any second mortgage loan is closed, and
limit the amount of mortgage-secured debt securities to 30% of average invested
assets on the date of their purchase. All other mortgage loans we make (or
church bonds purchased for investment) will be secured by a first mortgage or
deed of trust on the borrower's real property. As of June 30, 2005, the
percentage of average invested assets in second mortgage loans, and the
percentage of average invested assets in mortgage-secured debt securities, was
less than 1% and 21.6% respectively. As we attempt to make mortgage loans that
maximize interest income, we may make longer-term fixed-rate loans in our
discretion in order to reduce the risk of downward interest rate fluctuations.
Our lending and investing decisions, including determination of a
prospective borrower's or church bond issuer's financial credit worthiness, are
made for us by our advisor. We have no employees. Employees and agents of our
advisor conduct all aspects of our business, including (i) marketing and
advertising; (ii) communication with prospective borrowers; (iii) processing
loan applications; (iv) closing loans; (v) servicing loans; and (vi)
administering our day-to-day business activities. In consideration of its
services, the Advisor is entitled to receive a fee equal to 1.25% annually of
the Company's average invested assets, plus one-half of any origination fee
charged to borrowers on mortgage loans we make. The Advisor's management fees
are computed and payable monthly.
25
Current First Mortgage Loan Terms
We offer prospective borrowers a selection of loan types, which include a
choice of fixed or variable rates of interest indexed to the prime rate, the
U.S. Treasury 10-Year Notes, or another generally recognized reference index,
and having various terms to maturity, origination fees and other terms and
conditions. The terms of loans we offer may be changed by our advisor as a
result of such factors as (i) the credit quality and experience of the
borrowers; (ii) the terms of loans in our portfolio; (iii) competition from
other lenders; (iv) anticipated need to increase the overall yield on our
mortgage loan portfolio; (v) local and national economic factors; and (vi)
actual experience in borrowers' demand for the loans. We currently make the loan
types described in the table below. This table describes material terms of loans
available from us. The table does not purport to identify all possible terms,
rates, and fees we may offer. We may modify the terms identified below or offer
loan terms different than those identified below. Many loans are individually
negotiated and differ from the terms described below.
----------------------------------- -------------------------------------- -----------------------------
Loan Type Interest Rate (1) Origination Fee (2)
----------------------------------- -------------------------------------- -----------------------------
----------------------------------- -------------------------------------- -----------------------------
20/25 Year Term (3) Fixed @ 8.50%/8.75% respectively 3.5%
----------------------------------- -------------------------------------- -----------------------------
----------------------------------- -------------------------------------- -----------------------------
20 Year Term (3) Variable Annually @ Prime + 2.50% 3.5%
----------------------------------- -------------------------------------- -----------------------------
----------------------------------- -------------------------------------- -----------------------------
Renewable Term (4) Fixed @:
3 Year 7.75% 3.5%
5 Year 7.95% 3.5%
7 Year 8.25% 3.5%
10 Year 8.35% 3.5%
----------------------------------- -------------------------------------- -----------------------------
----------------------------------- -------------------------------------- -----------------------------
Construction 1 Year Term Fixed @ 9.00% 2.0%
----------------------------------- -------------------------------------- -----------------------------
(1) "Prime" means the prime rate of interest charged to preferred customers, as
published by a federally chartered bank chosen by us. We may also tie our
offered interest rates to other indexes.
(2) Origination fees are generally based on the original principal amount of
the loan and are collected from the borrower at the origination and renewal
of loans, one-half of which is payable directly to our advisor.
(3) Fully amortized repayment term. Amortization terms may vary, as may other
loan terms, depending on individual loan negotiations and competitive
forces.
(4) Renewable term loans are repaid based on a 20-year amortization schedule,
and are renewable at the conclusion of their initial term for additional
like terms up to an aggregated maximum of 20 years. We charge a fee of 1%
upon the date of each renewal. If renewed by the borrower, the interest
rate is adjusted upon renewal to Prime plus a specified percentage
"spread."
26
Property (Portfolio) of the Company
As of June 30, 2005, we had seventy-seven first mortgage loans aggregating
$34,570,879 in original principal amount, one second mortgage loan of $100,000
in original principal amount, and purchased $9,654,790 original principal amount
first mortgage bonds issued by churches. The table below identifies the
borrowing institutions and certain key terms of the loans currently comprising
our loan portfolio.
===================================== ============== ============== ============= ======================== ====================
Borrowing Church Loan Loan Interest Collateral Appraised Funding Date
Amount Term Rate Value
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
River of Life Church (1) $425,000 7 years 9.25% $600,000 05/06/96
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
St. Luke's Pentecostal (2) $207,000 5 years 6.75% $277,000 12/04/97
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Chapel International $115,000 5 years 10.00% $175,000 03/02/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Greater Hill Zion Baptist Church $500,000 20 years 9.75% $1,040,000 05/20/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Freewill Christian Center $596,000 20 years 10.00% $797,000 06/22/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bethel Temple of Longview $500,000 20 years 10.25% $1,550,000 07/04/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Greater Fort Lauderdale $605,000 20 years 9.75% $900,000 09/08/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Old Morning Star Church (3) $280,000 20 years 9.85% $356,000 12/21/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Christian Center $500,000 20 years 9.85% $926,000 01/21/00
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
St. Paul A.M.E Church $200,000 20 years 10.25% $325,000 11/02/00
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
First Metro Church of Houston $100,000 5 years 12.00% $3,500,000 12/13/00
(Second Mtg Loan)
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Second Missionary Baptist Church $225,000 20 years 10.25% $370,000 06/19/01
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bethel Christian Mission $268,000 20 years 10.25% $384,000 06/25/01
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
True Vine Gospel Church $350,000 25 years 9.95% $500,000 11/15/01
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Nehemiah Christian Center $115,000 3 years 8.5% $140,000 05/30/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Eagle Vision Community Church $165,000 20 years 9.25% $215,000 07/19/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Abundant Faith Apostolic Church of $400,000 20 years 9.25% $634,000 08/06/02
Deliverance
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Holly Grove Missionary Baptist $205,000 20 years 9.25% $461,900 09/19/02
Church
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Full Life Gospel Center $327,000 20 years 9.25% $560,000 11/27/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
House of Praise Ministries $610,000 20 years 8.75% $1,785,000 12/30/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
House of Joy & Praise Outreach $435,000 20 years 9.25% $780,000 12/30/02
Center
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
United Apostolic Church $950,000 25 years 9.50% $1,990,000 02/14/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bread of Life Baptist Church $763,000 20 years 9.25% $1,160,000 02/21/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Life Changing Faith Christian Church $460,000 20 years 9.00% $690,000 03/12/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Good News Family Worship Center $567,000 25 years 9.25% $750,000 03/13/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
United for Christ $267,000 25 years 8.75% $382,000 05/28/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Zion Hill Baptist Church $255,000 20 years 8.65% $365,000 05/30/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
27
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bend Christian Center $445,000 25 years 8.65% $1,010,000 06/19/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Believers New Life Ministries $280,000 5 years 7.95% $395,000 06/26/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Pembroke Park Church of Christ $520,000 20 years 8.65% $880,000 06/26/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Glad Tidings Community Church $663,000 25 years 8.75% $900,000 06/30/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Roanoke Chapel M.B. Church $1,955,000 25 years 8.75% $2,625,000 06/30/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Assured Faith C.O.G.I.C. $355,000 20 years 8.65% $565,000 08/01/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
The Apostolic Church of New York $335,000 20 years 9.25% $537,000 08/18/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
All Faith's Christian Center $645,000 20 years 8.65% $922,000 09/11/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Landmark Apostolic Church $400,000 20 years 8.65% $750,000 09/19/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Ekklesia Fellowship Ministries $227,500 20 years 8.65% $335,000 09/25/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Grace Christian Center $640,000 20 years 9.25% $1,310,000 10/14/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
All Saints Community Church $210,000 20 years 8.65% $300,000 11/25/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Tabernacle Jamaica $600,000 20 years 8.65% $950,143 11/25/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
The Word of the Living God $650,000 20 years 8.65% $1,125,000 12/16/03
Ministries, Inc.
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Tabernacle Deliverance $500,000 25 years 8.35% $1,058,000 12/19/03
Baptist Church
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Chesapeake Christian Center $551,077 20 years 8.25% $1,100,000 02/29/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Faith Christian Center $475,000 20 years 8.65% $746,000 04/21/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Christian Discipleship Ministries $410,000 25 years 8.50% $600,000 04/22/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Shiloh Temple House of God $500,000 20 years 8.25% $710,000 04/29/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Fun Family Christian Center $873,406 25 years 9.25% $1,290,850 05/22/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
The Lord Jesus Christ Church on the $195,000 20 years 8.25% $300,000 07/09/04
Rock
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
New Creation Family Church $498,651 20 years 9.25% $680,000 08/07/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Fellowship Christian Center $100,000 25 years 8.50% $154,000 08/11/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Crown of Life Community Church $220,000 20 years 8.25% $325,000 08/27/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
New Covenant Christian Fellowship $375,000 20 years 8.25% $700,000 08/30/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Serenity Church of God in Christ $190,000 20 years 8.25% $272,500 09/08/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Holy Deliverance Ministries $238,830 20 years 9.85% $360,000 09/14/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Holy Tabernacle Ministries $325,000 25 years 8.50% $500,000 09/16/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Iglesia Evangelica Apostoles Y $460,000 20 years 8.65% $756,800 09/17/04
Profetas Nazareth
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
First Church of the Spirit and Truth $530,000 20 years 8.25% $750,000 09/30/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bethany Uniting Faith Church $235,000 20 years 8.25% $330,000 10/11/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
28
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Manifestations Worldwide $1,240,000 20 years 8.25% $1,800,000 10/27/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Christ Wonderful World Outreach $543,000 20 years 8.25% $725,000 11/03/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Covenant Love Christian Center $785,000 20 years 8.25% $1,200,000 11/10/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Faith Christian Ministry $150,000 20 years 8.25% $220,000 11/15/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Rehoboth Faith Church of Jesus $410,000 20 years 8.25% $587,000 11/24/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
New Life Community Church of Truth $570,000 20 years 8.25% $790,000 11/30/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
La Casa del Alfarero $800,000 20 years 8.25% $1,500,000 12/17/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Lincoln Heights Missionary Baptist $620,000 20 years 8.25% $1,000,000 12/30/04
Church
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Betterway Ministries $220,000 20 years 8.50% $350,000 12/30/04
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Resurrection Temple $367,000 25 years 8.75% $675,000 01/27/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Zion Mission $410,000 25 years 8.50% $800,000 02/04/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
God's Praise & Worship Center $365,000 25 years 8.75% $600,000 02/10/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Temple Christian Fellowship $370,000 25 years 8.75% $663,000 02/22/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
For His Glory Christian Fellowship $925,000 25 years 8.50% $1,500,000 02/28/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Inter-Denominational Fellowship $315,000 25 years 8.75% $491,000 04/06/05
Ministries
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Mt. Ararat Baptist Church (4) $215,000 25 years 8.95% $1,000,000 04/24/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
True Vine Baptist Church $198,500 25 years 8.75% $265,000 06/01/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Calvary Baptist Church of Houston $250,000 25 years 8.95% $350,000 06/29/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
International Deliverance Center $500,000 25 years 8.95% $738,000 06/30/05
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Unity of Faith Worship Center $424,915 30 years 8.75% $835,150 06/30/05
===================================== ============== ============== ============= ======================== ====================
(1) Renewed for an additional six year period in June 2002.
(2) Renewed for an additional five year period in January 2003.
(3) Includes an initial loan in the amount of $250,000 and an additional
supplemental loan of $30,000 funded April 2001.
(4) New promissory note signed.
29
The following mortgage-secured bonds have been purchased by the Company:
===================================================================================================================================
Issuer Principal Company Face Yield of Yield to Current Maturity Original
Amount Purchase Bonds Maturity Yield Date Issue
Price Date
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $3,000 $3,000 9.50% 9.50% 9.50% 02/01/10 02/01/98
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle $1,000 $1,000 9.25% 9.25% 9.25% 08/01/08 02/01/98
Church
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Greater Open Door Church $610,000 $610,000 From 8.45% to N/A 9.44% Serially to 12/17/98
9.80% 05/01/18
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Church of the Great Commission $4,000 $4,000 10.50% 10.50% 10.50% 09/15/13 04/01/95
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
From the Heart Ministries, Inc. $3,000 $3,000 10.40% 10.40% 10.40% 02/15/19 02/15/01
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
From the Heart Ministries, Inc. $6,000 $6,000 10.40% 10.40% 10.40% 08/15/19 02/15/01
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Community Protestant Church $5,000 $4,600 10.05% 11.46% 10.92% 02/15/11 08/15/95
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Abundant Life Family Worship $3,000 $2,760 10.15% 11.65% 11.03% 02/15/10 10/15/95
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Abundant Life Family Christian $3,000 $2,940 10.10% 10.56% 10.31% 08/15/07 08/15/96
Center
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
From the Heart $3,000 $3,000 10.40% 10.40% 10.40% 02/15/19 02/15/01
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
From the Heart $1,000 $1,000 10.00% 10.00% 10.00% 02/15/11 02/15/01
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
From the Heart $1,000 $1,000 10.15% 10.15% 10.15% 02/15/11 02/15/01
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Greater Holy Trinity $861,000 $861,000 From 7.25% to N/A 9.15% Serially to 12/15/01
9.75% 12/15/21
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Community Protestant $5,000 $4,500 10.10% 11.53% 11.22% 05/15/16 11/15/97
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Community Protestant $3,000 $2,550 10.50% 12.62% 12.35% 04/01/20 04/01/00
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Community Protestant $3,000 $2,550 10.05% 12.89% 11.82% 02/15/11 08/15/95
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle $3,000 $2,670 10.20% 13.33% 11.46% 03/01/19 03/01/00
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Swope Parkway Church of Christ $8,000 $7,440 9.95% 11.20% 10.70% 11/01/11 11/01/97
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Miracle Revival Center $30,000 $28,500 10.00% N/A 10.53% From 06/01/18 12/01/99
to 12/01/18
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $15,000 $14,400 10.05% 10.64% 10.47% 02/01/15 02/01/98
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Christian Love Fellowship, Inc. $790.10 $505.66 8.00% 13.51% 12.50% 02/15/19 02/15/99
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $23,000 $20,470 9.95% 11.96% 11.18% 02/01/12 02/01/98
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $1,000 $940 10.10% 10.92% 10.74% 02/01/18 02/01/98
- -----------------------------------------------------------------------------------------------------------------------------------
30
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $1,000 $950 10.75% 11.50% 11.32% 03/01/16 03/01/00
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Harvest Baptist Church $10,000 $5,073.95 From 5.00% to N/A N/A 04/01/19 04/28/03
12.00%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Harvest Baptist Church $6,000 $3,031.14 From 5.00% to N/A N/A 04/01/19 04/28/03
12.00%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Greater St. Matthew's Baptist $372,000 $372,000 9.00% 9.00% 9.00% From 01/15/23 07/15/03
Church to 07/15/23
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Christian Church $210,000 $210,000 9.50% 9.50% 9.50% From 08/15/07 08/15/03
to 08/15/11
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $2,000,000 $2,000,000 From 5.35% to N/A 6.71% From 05/15/11 05/15/03
Church 7.50% to 05/15/22
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Peaceful Zion Missionary $10,000 $7,900 9.70% 17.25% 12.28% 10/15/07 10/15/93
Baptist Church
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Morning Star Missionary Baptist $10,000 $7,500 9.80% 14.40% 13.07% 09/15/14 09/15/94
Church
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
First Baptist Church of Corona $10,000 $7,900 11.20% 20.18% 14.18% 03/01/07 03/01/92
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Christian Pentecostal Church $10,000 $7,900 10.30% 17.51% 13.04% 02/01/08 02/01/93
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Central Holiness Church $10,000 $7,900 9.65% 17.12% 12.22% 11/15/07 11/15/93
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Macedonia Missionary Baptist $10,000 $7,900 11.20% 20.36% 14.18% 02/15/07 02/15/92
Church
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Antelope Valley Christian School $598,000 $598,000 From 4.00% to N/A 5.44% From 09/15/06 09/15/03
7.50% to 09/15/22
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $20,000 $20,000 7.35% 7.35% 7.35% 01/15/19 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $40,000 $40,000 7.75% 7.75% 7.75% 07/15/21 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $1,000 $1,000 7.50% 7.50% 7.50% 01/15/21 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester $1,965,000 $1,965,000 From 7.25% to N/A 7.70% From 03/01/18 03/01/04
8.00% to 03/01/29
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $48,000 $48,000 7.50% 7.50% 7.50% 01/15/21 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $68,000 $68,000 8.00% 8.00% 8.00% 01/15/27 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $3,000 $3,000 6.75% 6.75% 6.75% 01/15/15 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $3,000 $3,000 7.00% 7.00% 7.00% 01/15/16 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $8,000 $8,000 7.00% 7.00% 7.00% 07/15/16 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $10,000 $10,000 7.35% 7.35% 7.35% 01/15/19 01/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $5,000 $4,900 9.50% 9.96% 9.69% 02/01/10 02/01/98
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Community Protestant Church $6,000 $6,000 10.00% 10.00% 10.00% 10/01/18 04/01/00
- -----------------------------------------------------------------------------------------------------------------------------------
31
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $472,000 $472,000 7.75% 7.75% 7.75% From 03/01/23 03/01/04
to 09/01/23
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $59,000 $59,000 8.00% 8.00% 8.00% From 03/01/24 03/01/04
to03/01/29
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $17,000 $17,000 8.00% 8.00% 8.00% 03/01/24 03/01/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $1,000 $1,000 8.00% 8.00% 8.00% 03/01/28 03/01/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Miracle Revival Center $10,000 $9,600 9.60% 10.86% 10.00% 06/01/08 12/01/99
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $1,000 $1,000 8.00% 8.00% 8.00% 09/01/27 03/01/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $1,000 $1,000 8.00% 8.00% 8.00% 03/01/25 03/01/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $10,000 $10,000 8.00% 8.00% 8.00% 03/01/27 03/01/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $8,000 $8,000 8.00% 8.00% 8.00% 03/01/28 03/01/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Full Gospel Holy Temple $25,000 $23,500 7.25% 7.98% 7.71% 02/15/18 02/15/03
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Palm Beach Cathedral $1,000 $340 7.75% 30.09% 22.79% 01/25/12 01/25/97
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $796,000 $796,000 From 5.75% to N/A 6.09% From 09/01/11 03/01/04
7.50% to 03/01/21
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $30,000 $28,200 7.75% 8.41% 8.24% 03/01/22 03/01/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Antelope Valley Christian School $20,000 $18,600 7.50% 8.34% 8.06% 03/15/19 09/15/03
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $30,000 $27,300 7.00% 8.18% 7.69% 11/15/16 05/15/03
Church
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $10,000 $10,000 10.20% 10.20% 10.20% 03/01/20 03/01/00
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $400,000 $400,000 9.00% 9.00% 9.00% From 06/15/29 12/15/04
to 12/15/29
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Original Holy Ark Missionary $2,000 $2,000 10.00% 10.00% 10.00% 10/15/13 04/15/97
Baptist Church
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $97,000 $97,000 9.00% 9.00% 9.00% From 12/15/28 12/15/04
to 06/15/29
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $248,000 $248,000 7.75% 7.75% 7.75% From 12/15/20 12/15/04
to 06/15/21
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $150,000 $150,000 7.50% 7.50% 7.50% From 12/15/18 12/15/04
to 06/15/19
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $1,000 $1,000 6.00% 6.00% 6.00% 05/15/14 05/15/05
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $3,000 $3,000 6.50% 6.50% 6.50% 05/15/16 05/15/05
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $5,000 $5,000 6.75% 6.75% 6.75% 05/15/17 05/15/05
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $13,000 $13,000 7.00% 7.00% 7.00% From 11/15/17 05/15/05
to 11/15/19
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $12,000 $12,000 7.25% 7.25% 7.25% 11/15/21 05/15/05
- -----------------------------------------------------------------------------------------------------------------------------------
32
- -----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $4,000 $4,000 7.50% 7.50% 7.50% 05/15/23 05/15/05
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $24,000 $24,000 6.25% 6.25% 6.25% 06/15/12 12/15/04
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $76,000 $76,000 6.50% 6.50% 6.50% From 06/15/13 12/15/04
to 12/15/13
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $119,000 $119,000 6.75% 6.75% 6.75% From 06/15/14 12/15/04
to 12/15/14
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $5,000 $5,000 7.25% 7.25% 7.25% 12/15/16 12/15/04
===================================================================================================================================
Mortgage Loan Processing and Underwriting
Our advisor's personnel process and verify mortgage loan applications.
Verification procedures are designed to assure a borrower's qualification under
our financing policies. Verification procedures include obtaining:
o applications containing key information concerning the prospective borrower
o project description
o financial statements of the prospective borrower
o organizational documents and history of the borrower
o preliminary title report or commitment for mortgagee title insurance
o a real estate appraisal in accordance with our financing policies
We require that appraisals and financial statements be prepared by
independent third-party professionals who are pre-approved based on their
experience, reputation and education. Completed loan applications, together with
a written summary are then considered by our loan committee, comprised of our
advisor's president, our advisor's vice-president and our advisor's
administrator. Our advisor may arrange for the provision of mortgage title
insurance and for the services of professional independent third-party
accountants and appraisers on behalf of borrowers in order to achieve pricing
efficiencies on their behalf and to assure the efficient delivery of title
commitments, preliminary title reports and title policies, and financial
statements and appraisals meeting our loan lending criteria. Our advisor may
arrange for the direct payment for professional services and for the direct
reimbursement to it of related expenditures by borrowers and prospective
borrowers. Upon closing and funding of mortgage loans, an origination fee based
on the original principal amount of each loan is generally charged, of which
one-half is payable to us and one-half is payable to our advisor.
Loan Commitments
Subsequent to approval by our loan committee, and prior to funding a loan,
we issue a loan commitment to qualified applicants. We may charge a loan
commitment fee, but typically do not. Commitments indicate the loan amount,
origination fees, closing costs, underwriting expenses (if any), funding
conditions, approval expiration dates, interest rate and other terms.
Commitments generally set forth a "prevailing" interest rate that is subject to
change in accordance with market interest rate fluctuations until the final loan
closing documents are prepared. In certain cases we may establish ("lock-in")
interest rate commitments up to sixty days from the commitment to closing.
Interest rate commitments beyond sixty days will not normally be issued unless
we receive a fee premium based upon the assessment of the risk associated with a
longer "lock-in" period.
33
Loan Portfolio Management
Our advisor manages and services our portfolio of mortgage loans in
accordance with an advisory agreement. Our advisor is responsible for all
aspects of our mortgage loan business, including:
o closing and recording of mortgage documents
o collecting principal and interest payments
o enforcing loan terms and other borrower's requirements
o periodic review of each mortgage loan file
o determination of reserve classifications
o exercising our remedies in connection with defaulted or non-performing
loans
Fees and costs of attorneys, insurance, bonds and other direct expenses
incurred in connection with the exercise of remedies in connection with a loan
default are our responsibility, although they may be recouped from the borrower
in the process of pursuing our remedies. Our advisor will not receive any
additional compensation for services rendered in connection with on-going loan
portfolio management or exercising our remedies in the event of a loan default.
Loan Funding and Borrowing
Our mortgage loans and purchases of church bonds are funded with available
cash resources. Historically, we have obtained cash resources from the sale of
our common stock, the repayment of our investments in loans and bonds, the sale
of certificates and from our line of credit. We will use the proceeds of the
sale of certificates to fund mortgage loans and purchase church bonds. We may
borrow up to 300% of Shareholders' Equity. We have a $2,000,000 secured line of
credit facility with Beacon Bank, Shorewood, Minnesota. We intend to use this
loan facility to enable us to close loans on schedule while we may not otherwise
have adequate funds on hand. The Beacon Bank line of credit is secured by church
bonds owned by us. This line of credit is used periodically to fund loans when
we do not otherwise have sufficient capital to do so. Historically, the line has
been paid as soon as additional capital becomes available to us. We pay Beacon
Bank a rate of interest equal to the prime interest rate plus 1/2% totaling
6.75% on the outstanding balance on the line, in addition to a nominal annual
renewal fee.
Financing Policies
Our business of mortgage lending to churches and other non-profit religious
organizations is managed in accordance with and subject to our financing
policies. Our financing policies identify our general business guidelines and
the parameters of our lending business.
>> Loans we make are limited to churches and other non-profit religious
organizations and are secured by mortgages. The total principal amount of
our second mortgage loans is limited to 20% of our average invested assets.
All other loans and bonds will be secured by first mortgages.
>> The total principal amount of mortgage-secured debt securities we purchase
from churches and other non-profit religious organizations is limited to
30% of our average invested assets.
>> The loan amount cannot exceed 75% of the appraised value of the real estate
and improvements securing each loan. On all loans, we require a written
appraisal certified by a member of the Appraisal Institute or a
state-certified appraiser.
>> The borrower must furnish us with an ALTA (American Land Title Association)
or equivalent mortgagee title policy insuring our mortgage interest.
>> The borrower's long-term debt (including the proposed loan) cannot exceed
four times the borrower's gross income for the previous 12 months.
34
>> The borrower must furnish us with financial statements (balance sheet and
income and expense statement) for the last two complete fiscal years and a
current financial statement as of and for the period within 90 days of the
loan closing date. On loans of $500,000 or less, the last complete fiscal
year must be reviewed by an independent accounting firm. On loans in excess
of $500,000, our advisor may require that the last complete fiscal year
financial statements be audited by an independent auditor. Borrowers in
existence for less than three fiscal years must provide financial
statements since inception. We do not extend loans to borrowers in
operation less than two years absent express approval by our board of
directors.
>> Our advisor typically requires the borrower to arrange for automatic
electronic or drafting of monthly payments.
>> Our advisor may require (i) key-person life insurance on the life of the
senior pastor of a church; (ii) personal guarantees of church members
and/or affiliates; and (iii) other security enhancements for our benefit.
>> The borrower must agree to provide us with annual financial statements
within 120 days of each fiscal year end during the term of the loan.
>> Our advisor may require the borrower to grant to us a security interest in
all personal property located and to be located upon the mortgaged premises
(excluding property leased by the borrower).
>> We may make fixed-interest rate loans having maturities of three to
twenty-five years. >> We may borrow up to 300% of Shareholders' Equity.
We require borrowers to maintain a general perils and liability coverage
insurance policy naming us as the loss-payee in connection with damage or
destruction to the property of the borrower which typically includes
weather-related damage, fire, vandalism and theft. In its discretion, our
advisor may require the borrower to provide flood, earthquake and/or other
special coverage.
These financing policies are in addition to the prohibited investments and
activities set forth in our bylaws, which are discussed in the next section.
Prohibited Investments and Activities
Our bylaws impose certain prohibitions and restrictions on our investment
practices and activities, including prohibitions against:
>> Investing more than 10% of our total assets in unimproved real property or
mortgage loans on unimproved real property;
>> Investing in commodities or commodity futures contracts other than
"interest rate futures" contracts intended only for hedging purposes;
>> Investing in mortgage loans (including construction loans) on any one
property which in the aggregate with all other mortgage loans on the
property would exceed 75% of the appraised value of the property unless
substantial justification exists because of the presence of other
underwriting criteria;
>> Investing in mortgage loans that are subordinate to any mortgage or equity
interest of our advisor or our directors or any of their affiliates;
>> Investing in equity securities;
>> Engaging in any short sales of securities or in trading, as distinguished
from investment activities;
>> Issuing redeemable equity securities;
35
>> Engaging in underwriting or the agency distribution of securities issued by
others;
>> Issuing options or warrants to purchase our shares at an exercise price
less than the fair market value of the shares on the date of the issuance
or if the issuance thereof would exceed 10% in the aggregate of our
outstanding shares;
>> Issuing debt securities unless the debt service coverage for the most
recently completed fiscal year, as adjusted for known changes, is
sufficient to properly service the higher level of debt;
>> Investing in real estate contracts of sale unless such contracts are in
recordable form and are appropriately recorded in the chain of title;
>> Selling or leasing to our advisor, a director or any affiliate thereof
unless approved as being fair and reasonable by a majority of directors
(including a majority of independent directors), not otherwise interested
in such transaction;
>> Acquiring property from our advisor or any director, or any affiliate
thereof (other than church bonds from American Investors Group, Inc. in the
ordinary course of our investing activities), unless a majority of our
directors (including a majority of our independent directors) not otherwise
interested in such transaction approve the transaction as being fair and
reasonable and at a price no greater than the cost of the asset to our
advisor, director or any affiliate thereof, or if the price is in excess of
such cost, that substantial justification for such excess exists and such
excess is reasonable. In no event shall the cost of such asset exceed its
current appraised value;
>> Investing or making mortgage loans unless a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or
condition of title is obtained; or
>> Issuing our shares on a deferred payment basis or other similar
arrangement.
We do not intend to invest in the securities of other issuers for the
purpose of exercising control, to engage in the purchase and sale of investments
other than as described in this prospectus, to offer securities in exchange for
property unless deemed prudent by a majority of our directors, to repurchase or
otherwise reacquire our shares or to make loans to other persons except in the
ordinary course of our business as described herein.
We will not make loans to or borrow from, or enter into any contract, joint
venture or transaction with, any director or officer of ours, our advisor or any
affiliate of any of the foregoing unless a majority of our directors, including
a majority of the independent directors, approves the transaction as fair and
reasonable to us and the transaction is on terms and conditions no less
favorable to us than those available from unaffiliated third parties. If we
invest in any property, mortgage or other real estate interest pursuant to a
transaction with our advisor or any directors or officers thereof, then the
investment will be based upon a current appraisal of the underlying property
from an independent qualified appraiser selected by the independent directors
and will not be made at a price greater than fair market value as determined by
such appraisal.
Policy Changes
Our bylaw relating to policies, prohibitions and restrictions referred to
under "Our Business - Prohibited Investments and Activities" may not be changed
(except in certain immaterial respects by a majority approval of the board of
directors) without the approval of a majority of the independent directors and
the approval of the holders of a majority of our shares, at a duly held meeting
for that purpose.
Competition
The business of making loans to churches and non-profit religious
organizations is competitive. We compete with a wide variety of investors,
including banks, savings and loan associations, insurance companies, pension
funds and fraternal organizations which may have investment objectives similar
to ours. Some competitors have greater financial resources, larger staffs and
longer operating histories than we have. We compete by offering loans with
competitive and flexible terms, and emphasizing our expertise in this
specialized industry segment.
36
Employees
We have no employees. Subject to the supervision of our board of directors,
our business is managed by our advisor, which provides investment advisory and
administrative services to us. Our advisor is controlled by Philip J. Myers, our
president and one of our directors. Mr. Myers also controls the underwriter. At
present, certain officers and directors of the underwriter and our advisor are
providing services to us at no charge. These services include, among others,
legal and analytic services relating to the implementation of our business plan,
preparation of this prospectus (and registration statement of which this
prospectus is a part) and development and drafting of documents utilized by our
advisor in connection with our business operations.
Our advisor employs three persons on a part-time or other basis and expects
to hire additional persons depending on the success of this offering and the
volume of new loans to be funded. We do not expect to directly employ any
persons in the foreseeable future, since all administrative functions and
operations are contracted for through our advisor. Legal and accounting services
will be provided by outside professionals. We will pay for these services
directly.
Description of Property Acquired through Foreclosure
Foreclosure was completed on a loan to a church located in Battle Creek,
Michigan. We have determined the fair value of the property to be $105,000. The
church congregation has disbanded and the property is currently unoccupied. We
have taken possession of the church and have listed the property for sale
through a local realtor.
Foreclosure was completed on a loan to a church located in Tyler, Texas. We
have determined the fair value of the property to be $339,095. The church
congregation has disbanded and the property is currently unoccupied. We have
taken possession of the church and have listed the property for sale through a
local realtor.
Facilities
We are located in the 8,200 square foot offices of American Investors
Group, Inc., 10237 Yellow Circle Drive, Minnetonka, Minnesota 55343. These
facilities are owned by Yellow Circle Partners, LLP, a partnership controlled by
Philip J. Myers, our president and one of our directors. We are not charged any
rent for our use of these facilities, or for our use of copying services,
telephones, facsimile machines, postage service, office supplies or employee
services, which are paid by our advisor. Payments to our advisor under the
advisory agreement are intended, at least in part, to cover the general costs of
personnel, operating facilities, equipment and services used. We will not
reimburse our advisor for these expenses. We believe that the terms of this
arrangement are at least as favorable as those obtainable from unaffiliated
third parties. We believe that our current facilities will be adequate for the
foreseeable future.
37
MANAGEMENT
General
Directors are elected for a term expiring at the next annual meeting of our
shareholders and serve for one-year terms and until their successors are duly
elected and qualified. Annual shareholder meetings are typically held in May.
Officers serve at the discretion of the Board of Directors. Among other
requirements, in order to maintain our REIT status, a majority of our directors
must be "independent." Our executive officers and directors are as follows:
Name Age Office Director Since
Philip J. Myers 49 President, Treasurer, Secretary and Director 2001
Kirbyjon H. Caldwell 51 Independent Director 1994
Robert O. Naegele, Jr. 65 Independent Director 1994
Dennis J. Doyle 52 Independent Director 1994
Michael G. Holmquist 55 Independent Director 2003
Philip J. Myers has been our President since April 2001 and a director of
ACMC since October 2001. He has also served as President, Treasurer, shareholder
and a director of our advisor, Church Loan Advisors, Inc. since 1994, President,
Secretary, and a director of the underwriter, American Investors Group, Inc.
since 1996, and of its parent company, Apostle Holdings Corp. since 2000. Mr.
Myers has been an officer of the underwriter and directly engaged in church
mortgage lending since 1989. He earned his bachelor of arts degree in political
science in 1977 from the State University of New York at Binghamton and his
juris doctor degree from the State University of New York at Buffalo School of
Law in 1980. From 1980 to 1982, Mr. Myers served as an attorney in the Division
of Market Regulation of the U.S. Securities and Exchange Commission in
Washington, D.C. and, from 1982 to 1984, as an attorney with the Division of
Enforcement of the Securities and Exchange Commission in San Francisco. From
August 1984 to January 1986, he was employed as an attorney with the San
Francisco law firm of Wilson, Ryan and Compilongo where he specialized in
corporate finance, securities and broker-dealer matters. From January 1986 to
January 1989, Mr. Myers was engaged as Senior Vice-President and General Counsel
of Financial Planners Equity Corporation, a 400 broker securities dealer
formerly located in Marin County, California. He became affiliated with American
Investors Group, Inc. in 1989. He is a member of the New York, California
(inactive status) and Minnesota State Bar Associations. Mr. Myers holds General
Securities Representative and General Securities Principal licenses with the
National Association of Securities Dealers, Inc.
Kirbyjon H. Caldwell, has served as an independent director of ACMC since
September 1994. He has been Senior Pastor of Windsor Village United Methodist
Church in Houston, Texas since January 1982. The membership of Windsor Village
is approximately 14,400. Mr. Caldwell received his B.A. degree in Economics from
Carlton College (1975), an M.B.A. in Finance from the University of
Pennsylvania's Wharton School (1977), and his Masters in Theology from Southern
Methodist University School of Theology (1981). He is a member of the Boards of
Directors of JP Morgan Chase--Texas, Continental Airlines, National Children's
Defense Fund, Baylor College of Medicine, Greater Houston Partnership and the
American Cancer Society. He is also the founder and member of several
foundations and other community development organizations.
Robert O. Naegele, Jr. has served as an independent director since
September 1994. Mr. Naegele's professional background includes advertising, real
estate development and consumer products, with a special interest in
entrepreneurial ventures and small developing companies. Most recently, he led a
group of investors to apply for, and receive an NHL expansion franchise, the
Minnesota Wild, which began play in the Xcel Energy Center in St. Paul,
Minnesota, in October 2000.
Dennis J. Doyle has served as an independent director since September 1994.
He is the majority shareholder and co-founder of Welsh Companies, Inc.,
Minneapolis, Minnesota, a full-service real estate company involved in property
management, brokerage, investment sales, construction and commercial
development. Welsh Companies was co-founded by Mr. Doyle in 1980, and has over
350 employees. Mr. Doyle is the recipient of numerous civic awards relating to
his business skills. He also is a member of the post board of directors of
Rottlund Homes and Hope For the City.
Michael G.Holmquist has served as an independent director of the Company
since July 17, 2003. Mr. Holmquist is a Certified Public Accountant practicing
from his office in Deephaven, Minnesota. He entered the public accounting field
in 1977. Prior to entering the accounting field he worked for two years as a
public school teacher and served four years in the U.S. Coast Guard. He is a
graduate of St. Olaf College and has taken additional studies in accounting and
income tax at the University of
38
Minnesota. Mr. Holmquist was an original incorporator of American Investors
Group, Inc. and an employee of the firm from 1986-1989. He participated in
establishing the firm's church bond underwriting department and has extensive
additional experience in church auditing. Mr. Holmquist is a member of the
American Institute of CPAs and the Minnesota Society of CPAs.
Day-to-Day Management of Operations
We have no employees. Our advisor manages our day-to-day operations under
the advisory agreement. Our officers receive no compensation for their services,
other than through their interests in our advisor and our affiliates. Our
officers have no employment contracts with us or our advisor and are considered
employees of the advisor "at will." We believe that because of the depth of
management of our advisor and its affiliates the loss of one or more key
employees of our advisor, or one or more of our officers, would not have a
material adverse effect upon our operations. As required by our bylaws, a
majority of our directors are independent directors in that they are otherwise
unaffiliated with and do not receive compensation from us (other than in their
capacity as directors) or from our advisor or the underwriter.
Duties of Directors
Our directors are responsible for considering and approving our policies.
Directors meet as often and devote such time to our business as their oversight
duties may require. Pursuant to our bylaws, the independent directors have the
responsibility of evaluating the capability and performance of our advisor and
determining that the compensation we pay to our advisor is reasonable. During
2004, our directors held four meetings. All of our directors attended more than
75% of our board meetings.
Neither our articles of incorporation or bylaws nor any of our policies
restrict officers or directors from conducting, for their own account, or on
behalf of others, business activities of the type we conduct.
Directors and officers have a duty to us and our shareholders. Our
directors may be removed by a majority vote of all shares outstanding and
entitled to vote at any annual meeting or special meeting called for such
purpose.
Executive Compensation
Officers are not compensated other than through their interest in our
advisor.
We currently pay each of our independent directors a fee of $500 for each
board meeting ($400 for telephonic meetings), limited to $2,500 per year. We
reimburse directors for travel expenses incurred in connection with their duties
as directors. In 2004, our independent directors (four in number) were paid a
total of $5,800 in director's fees.
Fiduciary Responsibility of Board of Directors and Indemnification
The board of directors and our advisor are accountable to us and to our
shareholders as fiduciaries. Consequently, they must exercise good faith and
integrity in handling our affairs. Similarly, our advisor has contractual
obligations to us which it must discharge with the utmost good faith and
integrity.
Our articles require us to indemnify and pay or reimburse reasonable
expenses to any individual who is our present or former director, advisor or
affiliate, provided that: (i) the director, advisor or affiliate seeking
indemnification has determined, in good faith, that the course of conduct which
caused the loss or liability was in our best interest; (ii) the director,
advisor or affiliate seeking indemnification was acting on our behalf or
performing services on our behalf; (iii) such liability or loss was not the
result of negligence or misconduct on the part of the indemnified party, except
that in the event the indemnified party is or was an independent director, such
liability or loss shall not have been the result of gross negligence or willful
misconduct; and (iv) such indemnification or agreement to be held harmless is
recoverable only out of our assets and not from our shareholders directly.
We may advance amounts to persons entitled to indemnification for legal and
other expenses and costs incurred as a result of legal action instituted against
or involving such person if: (i) the legal action relates to the performance of
duties or services by the indemnified party for or on our behalf; (ii) the legal
action is initiated by a third party who is not a shareholder, or the legal
action is initiated by a shareholder acting in his or her capacity as such and a
court specifically approves such advancement; and (iii) the indemnified party
receiving such advances undertakes, in writing, to repay the advanced funds,
with interest at the rate we determined, in cases in which such party would not
be entitled to indemnification.
39
Notwithstanding the foregoing, we may not indemnify our directors, advisor,
or affiliates and any persons acting as a broker-dealer for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities by such party unless one or more of the following conditions
are met: (i) there has been a successful adjudication on the merits of each
count involving alleged securities law violations as the particular indemnitee;
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee; or (iii) a court of
competent jurisdiction approves a settlement of the claims against a particular
indemnitee and finds that indemnification of the settlement and the related
costs should be made, and the court considering the request for indemnification
has been advised of the position of the Securities and Exchange Commission and
of the published position of any state securities regulatory authority in which
our securities were offered or sold as to indemnification for violations of
securities laws.
Subject to the limitations described above, we have the power to purchase
and maintain insurance on behalf of an indemnified party. We may procure
insurance covering our liability for indemnification. The indemnification
permitted by our Articles is more restrictive than permitted under the Minnesota
Business Corporation Act.
Warrants and Options
In January 2003, we terminated our stock option plan for directors and the
adviser and outstanding stock options were surrendered and cancelled. No options
were exercised during the option plan's existence. No options or warrants are
outstanding as of the date of this Prospectus.
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth as of September 1, 2005, certain information
regarding beneficial ownership of our shares, by (i) each person known by us to
be the beneficial owner of 5% or more of the outstanding shares; (ii) each of
our directors and executive officers; and (iii) all of our directors and
officers as a group. Unless otherwise noted, each of the following persons has
sole voting and investment power with respect to the shares set forth opposite
their respective names.
Number of Shares Percentage of Outstanding
Name of Beneficial Owner (1) Beneficially Owned Shares
Apostle Coastal, LLC (2) 20,000 0.8%
Robert O. Naegele, Jr. 8,033 0.3%
Kirbyjon H. Caldwell 0 0%
Dennis J. Doyle 0 0%
Michael G. Holmquist 0 0%
All Executive Officers and Directors as a Group 28,333 (3) 1.2%
(5 individuals)
(1) The address for Apostle Coastal, LLC and each of our directors is 10237
Yellow Circle Drive, Minnetonka, Minnesota 55343.
(2) Our President, Philip J. Myers is the President of Apostle Costal, LLC and
thus controls Apostle Coastal.
(3) Includes 300 shares owned by Scott J. Marquis. Mr. Marquis is an officer of
our advisor.
40
CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT
Our advisor, Church Loan Advisors, Inc., manages our business subject to
the supervision of our board of directors. Our advisor provides us with
investment advisory and administrative services. Our President, Philip J. Myers
is the President of our advisor. Mr. Myers is also the President of Apostle
Holdings Corp., which owns American Investors Group, Inc. (the underwriter of
this offering) and thus Mr. Myers is in a position of control of both entities.
Our advisor employs, among others, two key persons on a part-time basis,
including Philip J. Myers, President and Scott J. Marquis, Vice President. Our
advisor, on our behalf, regularly uses the services of personnel employed by
American Investors Group, Inc. We incur no direct cost for such services, except
for the advisory fee we pay to our advisor.
Transactions With Our Advisor
We pay our advisor advisory fees and expenses. In addition, our advisor
receives one-half of any origination fees associated with a mortgage loan made
or renewed by us. For the six-month period ended June 30, 2005, we paid our
advisor advisory fees in the amount of $203,897 and our advisor received loan
origination fee income of $63,437. For the year ended December 31, 2004, we paid
our advisor advisory fees in the amount of $255,290 and our advisor received
loan origination fee income of $188,826. In 2003, we paid our advisor advisory
fees in the amount of $269,043 and our advisor received loan origination fee
income of $275,860. In 2002, we paid our advisor advisory fees in the amount of
$172,151 and our advisor received loan origination fee income of $98,270. In
2001, we paid our advisor total advisory fees in the amount of $161,131 and our
advisor received loan origination fees income of $37,297. In 2000, we paid our
advisor total advisory fees in the amount of $154,389 and our advisor received
loan origination fee income of $21,250. Our advisor voluntarily waived $12,250
in advisory fees in 2000. The waiver of fees by our advisor in 2000 was
voluntary and cannot be expected to occur in the future. We believe that the
terms of the advisory agreement are no less favorable to us had we entered into
the agreement with an independent third party as advisor.
Transactions with the Underwriter
Pursuant to a distribution agreement we have entered into with the
underwriter, we will pay the underwriter a commission based on the gross
principal amount and maturity of certificates sold in this offering and an
underwriter's management fee based on the principal amount and term of
certificates sold in this offering. We will also pay the underwriter a
commission when certificates are renewed. We will also pay the underwriter a
non-accountable expense reimbursement of up to $120,000, assuming all of the
certificates are sold. As of June 30, 2005, we have paid $47,268 in
non-accountable expense reimbursement to the underwriter. The underwriter is an
affiliate of our advisor. We believe that the terms of the distribution
agreement are no less favorable to us than if we had entered into the agreement
with an independent third party. The following table sets forth the name and
positions of certain officers and all directors of the underwriter:
Name Position
Philip J. Myers President, Treasurer and Director
Scott J. Marquis Chief Financial and Operating Officer
In the course of our business, we may purchase church bonds being
underwritten and sold by American Investors Group, Inc., ("American"). Although
we would not pay any commissions, American will benefit from such purchases as a
result of commissions paid to it by the issuer of the bonds. American also may
benefit from mark-ups on bonds we buy from it and mark-downs on bonds we sell
through it on the secondary market. We will purchase church bonds for investment
purposes only, and only at the public offering price. Church bonds we purchase
in the secondary market, if any, will be purchased at the best price available,
subject to customary markups (or in the case of sales - markdowns), on terms no
less favorable than those applied to other customers of American. Principals of
ours and our advisor may receive a benefit in connection with such transactions
due to their affiliation with the underwriter. Other than with respect to the
purchase and sale of church bonds for our portfolio in the ordinary course of
business, all future transactions between us and our officers, directors and
affiliates will be approved, in advance, by a majority of our independent and
disinterested directors.
41
THE ADVISOR AND THE ADVISORY AGREEMENT
Church Loan Advisors, Inc.
Church Loan Advisors, Inc. renders lending and advisory services to us and
administers our business affairs and operations. Our advisor's offices are
located at 10237 Yellow Circle Drive, Minnetonka (Minneapolis), Minnesota 55343.
The following table sets forth the names and positions of the officers and
directors of our advisor:
Name Position
Philip J. Myers President, Treasurer and Director
Scott J. Marquis Vice President, Secretary
Scott J. Marquis, age 47, is Vice-President and Secretary of our advisor,
having served in such capacities since December 1994. He is also currently
employed full-time as Chief Financial and Operating Officer of the underwriter,
American Investors Group, Inc., where he has been employed since February 1987.
Prior to his employment with American Investors Group, Inc., Mr. Marquis was
employed for approximately seven years with the Minneapolis-based broker dealer,
Piper Jaffray Companies in various capacities within its operations department.
Mr. Marquis attended the University of Minnesota, Minneapolis, Minnesota and
served in the United States Coast Guard Reserve. Mr. Marquis is a licensed
financial principal and registered representative of American Investors Group,
Inc., holds his Series 7, 63 and 27 licenses from the National Association of
Securities Dealers, Inc. and holds a Minnesota life/accident/health insurance
license.
See "Management" for a description of the positions and business experience
of Philip J. Myers.
The Advisory Agreement
We have entered into an advisory agreement with our advisor under which our
advisor provides advice and recommendations concerning our business affairs,
provides us with administrative services and manages our day-to-day affairs. Our
advisor provides us with the following services:
o serves as our mortgage loan underwriter and advisor in connection with our
primary business of making loans to churches
o advises and selects church bonds for us to purchase and hold for investment
o services all mortgage loans that we make
o provides marketing and advertising and generates loan leads directly and
through its affiliates
o deals with borrowers, lenders, banks, consultants, accountants, brokers,
attorneys, appraisers, insurers and others
o supervises the preparation, filing and distribution of tax returns and
reports to governmental agencies, prepares reports to shareholders and acts
on our behalf in connection with shareholder relations
o provides office space, personnel, supplies, equipment and communications
o reports to us on its performance of the foregoing services
o furnishes advice and recommendations with respect to other aspects of our
business.
The advisory agreement expires annually. We expect to renew the agreement
annually, subject to our determination, including a majority of the independent
directors, that our advisor's performance has been satisfactory and that the
compensation we have paid to our advisor has been reasonable. We may terminate
the advisory agreement on 60 days written notice with or without cause or
penalty upon a vote of the majority of our independent directors. Upon
termination of the advisory agreement by either party, our advisor may require
us to change our name to a name that does not contain the word "American,"
"America" or the name of our advisor or any approximation or abbreviation
thereof, and that is sufficiently dissimilar to the word "America" or "American"
or the name of our advisor as to be unlikely to cause confusion or
identification with either our advisor or any person or entity using the word
"American" or "America" in its name. We may continue to use the word "church" in
our name. Our directors will determine that any successor advisor possesses
sufficient qualifications to perform the advisory function for us and justify
the compensation provided for in its contract with us.
42
Our advisor's compensation under the advisory agreement is set forth under
"Compensation to Advisor and Affiliates." Our advisor is required to pay all of
the expenses it incurs in providing services to us, including, personnel
expenses, rental and other office expenses, expenses of officers and employees
of our advisor, and all of its overhead and miscellaneous administrative
expenses relating to performance of its functions under the advisory agreement.
We pay other expenses, including expenses of reporting to governmental agencies
and shareholders, fees and expenses of appraisers, directors, auditors, outside
legal counsel and transfer agents, and costs directly incurred relating to
closing of loan transactions and to enforcing loan agreements.
In the event that our total operating expenses (before interest expense)
exceed in any calendar year the greater of (a) 2% of our average invested assets
or (b) 25% of our net income, our advisor must reimburse us, to the extent of
its fees for such calendar year, for the amount by which the aggregate annual
operating expenses paid or incurred exceeds the limitation. The independent
directors may, upon a finding of unusual and non-recurring factors which they
deem sufficient, determine that a higher level of expenses is justified.
Our bylaws require the independent directors to determine at least annually
the reasonableness of the compensation we pay to our advisor. Our independent
directors originally approved the Amended and Restated Advisory Agreement and
the Amended and Restated Bylaws on May 19, 1995 and most recently approved on
January 22, 2004 the renewal of the Restated Advisory Agreement for another
year. Factors considered in reviewing the advisory fee include the size of the
fees of our advisor in relation to the size, composition and profitability of
our loan portfolio, the rates charged by other investment advisors performing
comparable services, the success of our advisor in generating opportunities that
meet our investment objectives, the amount of additional revenues realized by
our advisor for other services performed for us, the quality and extent of
service and advice furnished by our advisor, the quality of our investments in
relation to investments generated by our advisor for its own account, if any,
and the performance of our investments. In addition, on January 22, 2004, the
board approved, as recommended by our advisor, to revise the management fee
payout structure to the advisor. It is the opinion of our advisor that certain
economies of scale are reached as our assets continue to grow. Loan servicing,
accounting, legal and banking are costs which remain relatively constant with
continual deployment of funds into loans and investments. We pay our advisor an
annual advisory fee equal to a 1.25% of our average invested assets. This fee is
reduced to 1.0% on average invested assets from $35 million to $50 million and
to .75% on average invested assets over $50 million.
The advisory agreement requires us to indemnify our advisor and each of its
directors, officers and employees against expense or liability arising out of
such person's activities in rendering services to us, provided that the conduct
against which the claim is made was determined by such person, in good faith, to
be in our best interest and was not the result of negligence or misconduct.
The foregoing is a summary of the material provisions of the advisory
agreement. Reference is made to the advisory agreement, filed as an exhibit to
the registration statement of which this prospectus is a part, for a complete
statement of its provisions.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH THE CERTIFICATES
The following discussion summarizes the material United States federal
income tax consequences relating to the acquisition, ownership and disposition
of the certificates, and it is not exhaustive of all possible tax
considerations. This discussion does not provide a discussion of any estate,
state, local, or foreign tax considerations.
The information in this summary is based on the Internal Revenue Code (the
"Code"), current, temporary, and proposed Treasury regulations promulgated under
the Code, the legislative history of the Code, current administrative
interpretations and practices of the Internal Revenue Service ("IRS"), and court
decisions, all as of the date of this prospectus. The administrative
interpretation and practices of the IRS upon which this summary is based
includes the practices and policies as expressed in private letter rulings,
which are not binding on the IRS, except with respect to taxpayers who request
and receive such rulings. No assurance can be given that future legislation,
Treasury regulations, administrative interpretations and practices, and court
decisions will not significantly change current law, or adversely affect the
existing interpretations of current law, on which the information in this
summary is based. Even if there is no change in applicable law, no assurance can
be provided that the statements made in the following summary will not be
challenged by the IRS or will be sustained by a court if so challenged, and we
will not seek a ruling with respect to any part of the information discussed in
this summary. This summary is qualified in its entirety by the applicable Code
provisions, Treasury regulations, and administrative and judicial
interpretations of the Code.
43
The discussion applies only to original purchasers of certificates at par
value. The discussion is included for general information purposes only and does
not deal with persons in special situations, such as banks or other financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, tax-exempt entities, persons holding certificates in a
tax-deferred or tax-advantaged account traders in securities that elect to use a
mark-to-market accounting method for securities holdings, expatriates, persons
holding certificates as a hedge against currency or interest-rate risks, as a
position in a "straddle," or as part of a "hedging," "conversion," or integrated
transaction for federal income tax purposes consisting of the certificates and
one or more other investments, holders who are U.S. persons for federal income
tax purposes whose functional currency for federal income tax purposes is not
the U.S. dollar, holders who are not U.S. persons for federal income tax
purposes, trusts and estates, and pass-through entities, any equity holder of
which is any of the foregoing. This discussion also assumes that you will hold
the certificates as "capital assets" within the meaning of Section 1221 of the
Code.
YOU ARE ADVISED TO CONSULT WITH YOUR OWN TAX ADVISOR TO DETERMINE THE
IMPACT OF YOUR PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE
ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES. THIS INCLUDES THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF THE ACQUISITION,
OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES AND POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Tax Classification of the Certificates
We believe that the certificates will be classified as debt of our company
for federal income tax purposes. By your acceptance of a certificate, and by
virtue of any person's acquisition of a beneficial interest in a certificate,
you and or any such beneficial owner agree to treat the certificates as debt for
all tax purposes.
Our characterization of the certificates as debt is not binding on the IRS,
and the IRS could assert that the certificates represent an ownership interest
in the equity of the company or in the mortgage collateral. The IRS's treatment
of the certificates as equity interests could adversely affect our ability to
maintain our REIT status, and could result in collateral tax consequences to
certificate holders, including changes in the characterization and timing of
income received with respect to the certificates and could adversely affect our
cash flow. The remainder of this discussion assumes that the certificates are
treated as debt for federal income tax purposes.
Interest Income on the Certificates
We will pay interest on the certificates quarterly. Interest paid on the
certificates will generally be taxable to you as ordinary income as the interest
is paid to you if you are a cash-method taxpayer or as the interest accrues if
you are an accrual method taxpayer.
Treatment of Dispositions of Certificates
Upon the sale, exchange, retirement or other taxable disposition of a
certificate, you will recognize gain or loss in an amount equal to the
difference between the amount realized on the disposition (other than any
amounts attributable to, and taxable as, accrued interest) and your adjusted tax
basis in the certificate. Your adjusted tax basis of a certificate generally
will equal your original cost for the certificate, increased by any accrued but
unpaid interest you previously included in income with respect to the
certificate and reduced by any principal payments you previously received with
respect to the certificate. Any gain or loss will be capital gain or loss,
except for gain representing accrued interest not previously included in your
income. This capital gain or loss will be long-term or capital gain or loss if
the certificate had been held for more than one year and otherwise short-term
capital gain or loss.
Reporting and Backup Withholding
We will report annual interest income paid and any other information that
is required to be reported with respect to the certificates, to the Internal
Revenue Service and to holders of record that are not excepted from the
reporting requirements.
Under certain circumstances, as a holder of a certificate, you may be
subject to "backup withholding." Backup withholding may apply to you if you are
a United States person and, among other circumstances, you fail to furnish your
Social Security Number or other taxpayer identification number to us. Backup
withholding may apply, under certain circumstances, if you are a foreign person
and fail to provide us with the statement necessary to establish an exemption
from federal income
44
and withholding tax on interest on the certificates. Backup withholding is not
an additional tax and may be refunded against your United States federal income
tax liability provided that you furnish the Internal Revenue Service with
certain required information.
FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH REITS
The discussion of federal income tax treatment of real estate investment
trusts ("REITs") set forth below is a summary. It does not address all potential
consequences of whether we qualify as a REIT.
Qualification as a Real Estate Investment Trust
General. We operate as a REIT under the Code. Our ability to qualify as a
REIT depends, in part, on the timing and nature of our investments. There can be
no assurance that we will continue to qualify as a REIT. Qualification as a REIT
is dependent on future events. No assurance can be given that our business or
that the actual results of our operation for any particular taxable year will
satisfy the REIT requirements. The anticipated income tax treatment described in
this prospectus may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time.
The following is a general summary of the provisions that govern the
federal income tax treatment of a REIT. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
Benefits of Qualification as a REIT. The Code provides special tax
treatment for organizations that qualify as REITs. An entity that qualifies as a
REIT generally is not subject to federal corporate income taxes on its net
income that is currently distributed to shareholders. This treatment
substantially eliminates the "double taxation" that generally results from
investment in a corporation. "Double taxation" means being subject to tax once
at the corporate level when income is earned, and once again at the shareholder
level when the income is distributed to shareholders.
Even if we qualify as a REIT, we will be subject to federal income tax as
follows:
o We will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains.
o Under certain circumstances, we may be subject to the "alternative
minimum tax" on our items of tax preference.
o If we have (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers
in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest
regular corporate rate on such income.
o If we have net income from "prohibited transactions" (which are, in
general, certain sales or other dispositions of property (other than
foreclosure property) held primarily for sale to customers in the
ordinary course of our business (i.e., when we are acting as a
dealer)), such income will be subject to a 100% tax.
o If we fail to distribute by the end of each year at least the sum of
(i) 90% of our REIT ordinary income for such year, (ii) 90% of our
REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, we will be subject to
a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable, but for Sections 856 through 859 of the Code, as a domestic
corporation; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial ownership
of which is held by 100 or more persons; (vi) during the last half of each
taxable year not more than 50% of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (which term includes
certain entities); and (vii) which meets certain other tests, described below.
Conditions (i) to (iv) must be met during the entire taxable year. Condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months.
45
To qualify as a REIT for a taxable year, we must elect or previously have
elected to be so treated and must meet other requirements, including percentage
tests relating to the sources of its gross income, the nature and
diversification of our assets and the distribution of our income to our
shareholders.
The Effect of Failure to Qualify as a Real Estate Investment Trust
If we fail to qualify as a REIT in any taxable year and the relief
provisions described above do not apply, then we will be subject to a tax
(including any applicable minimum tax) on our taxable income computed in the
usual manner for corporate taxpayers without any deduction for dividends paid.
In such event, to the extent of current and accumulated earnings and profits,
all distributions to shareholders will be taxable to us at the corporate level
as ordinary income, and, subject to certain limitations in the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, we will also be
prohibited from electing to be taxed as a REIT for the four taxable years
following the year during which qualification is lost. To renew our REIT
qualifications at the end of such a four-year period, we would be required to
distribute all of our current and accumulated earnings and profits before the
end of the period. Loss of REIT status from either our disqualification as a
REIT or our revocation of REIT status would not affect whether we may deduct
interest paid to certificate holders for United States federal income tax
purposes. To generate funds with which to pay federal income taxes because of
the loss of REIT status, however, could reduce our funds that are available for
investment, could cause us to incur additional indebtedness, or could cause us
to liquidate investments, each of which could affect adversely our ability to
make interest payments to holders of certificates.
ERISA CONSIDERATIONS
Certain employee benefit plans and individual retirement accounts and
individual retirement annuities (collectively, "Plans"), are subject to various
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Internal Revenue Code. Before investing in the certificates, a
Plan fiduciary should ensure that such investment is in accordance with ERISA's
fiduciary standards and that the investment will comply with the
diversification, prudence, liquidity, and composition requirements of ERISA. A
Plan fiduciary also should consider the prohibitions under ERISA on improper
delegation of control over, or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, or
permits, by action or inaction, the occurrence of, or fails to remedy, a known
breach of duty by another fiduciary with respect to "plan assets," and a Plan
fiduciary should consider the need to value the assets of the Plan annually. A
Plan fiduciary also should ensure that the investment is in accordance with the
governing instruments and the overall policy of the Plan. In addition,
provisions of ERISA and the Code prohibit certain transactions in Plan assets
that involve persons who have specified relationships with a Plan. The
consequences of such prohibited transactions include excise taxes,
disqualifications of IRAs and other liabilities. A Plan fiduciary should ensure
that any investment in the shares will not constitute a prohibited transaction.
A Plan fiduciary also should consider the illiquid nature of an investment in
our certificates and that no secondary market will exist for them.
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 50,000,000 undesignated shares, of
which our board of directors has established that 30,000,000 shares are Common
Stock, par value of $0.01 per share. Pursuant to our articles of incorporation,
our board of directors has the authority to divide the balance of the authorized
capital stock into classes and series with relative rights and preferences and
at such par value as the board of directors may establish from time to time.
Each share of Common Stock is entitled to participate equally in dividends when
and as declared by the directors and in the distribution of our assets upon
liquidation. Each authorized share is entitled to one vote and will be fully
paid and nonassessable upon issuance and payment therefor. Each authorized share
has no preference, conversion, exchange, preemptive or cumulative voting rights.
There are no cumulative voting rights in electing directors.
46
Repurchase of Shares and Restrictions on Transfer
Two of the requirements for qualification for the tax benefits accorded by
the real estate investment trust provisions of the Internal Revenue Code are
that (i) during the last half of each taxable year not more than 50% of the
outstanding capital stock may be owned directly or indirectly by five or fewer
individuals and (ii) there must be at least 100 shareholders for at least 335
out of 365 days of each taxable year or the proportionate amount for any partial
taxable year.
Our articles of incorporation prohibit any person or group of persons from
holding, directly or indirectly, ownership of a number of shares in excess of
9.8% of the outstanding capital stock. Shares owned by a person or group of
persons in excess of such amounts are referred to in the articles of
incorporation and herein as "excess shares." For this purpose, shares shall be
deemed to be owned by a person if they are constructively owned by such person
under the provisions of Section 544 of the Code (as modified by Section 856(h)
of the Code) or are beneficially owned by such person under the provisions of
Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The term "group" has the same meaning as that term has for
purposes of Section 13(d)(3) of the Exchange Act. Accordingly, shares owned or
deemed to be owned by a person who individually owns less than 9.8% of the
outstanding capital stock may nevertheless be Excess Shares if such person is a
member of a group which owns more than 9.8% of the outstanding capital stock.
Our articles of incorporation provide that in the event any person acquires
excess shares, we may redeem such Excess Shares, at the discretion of the board
of directors. Except as set forth below, the redemption price for excess shares
is, the closing price as reported on the NASDAQ System on the last business day
prior to the redemption date or, if the shares are listed on an exchange, the
closing price on the last business day prior to the redemption date or, if
neither listed on an exchange nor quoted on the NASDAQ System, the net asset
value of the excess shares as determined in good faith by the board of
directors. In no event, however, may the purchase price of the shares redeemed
be greater than their net asset value as determined by the board of directors in
good faith. To redeem excess shares, the board of directors must give a notice
of redemption to the holder of such excess shares not less than 30 days prior to
the date fixed by the board of directors for redemption. The redemption price
for excess shares will be paid on the redemption date fixed by the board of
directors and included in such notice. Excess shares cease to be entitled to any
distribution and other benefits from and after the date fixed for redemption,
except the right to payment of the redemption price for such shares.
Under our articles of incorporation, any transfer of shares that would
result in our disqualification as a real estate investment trust under the Code
is void to the fullest extent permitted by law. The board of directors is
authorized to refuse to transfer shares to a person if, as a result of the
transfer, that person would own excess shares. Upon demand by the board of
directors, a shareholder is required to provide us with an affidavit setting
forth, as to that shareholder, the information required to be reported in
returns filed by shareholders under the Treasury Regulation Section 1.857-9 and
in reports filed under Sections 13(d) and 16(b) of the Exchange Act. Each
proposed transferee of shares, upon demand of the board of directors, also may
be required to provide us with a statement or affidavit setting forth the number
of shares already owned by the transferee and any related persons. The transfer
or sale of shares also are subject to compliance with applicable state "Blue
Sky" laws.
Repurchase of Shares by Us
Although our shares are not redeemable, we may at our complete discretion,
repurchase shares offered to us by shareholders. We may pay whatever price our
advisor deems appropriate and reasonable and is acceptable to the selling
shareholder and us. Any shares repurchased will be re-designated as "unissued,"
will no longer be entitled to distribution of dividends, and will cease to have
voting rights.
Transfer Agent and Registrar
The transfer agent and registrar for our capital stock is Computershare
Trust Company, Inc., 350 Indiana Street Suite 800, Golden, CO 80401, telephone:
(303) 262-0600.
DESCRIPTION OF THE CERTIFICATES
General. The certificates we are offering by this prospectus are secured
debt obligations of American Church Mortgage Company. We will issue the
certificates under an indenture between us and Herring Bank, as trustee. The
terms and conditions of the certificates include those stated in the indenture
and those made part of the indenture by reference to the Trust Indenture Act of
1939. The following is a summary of some, but not all, provisions of the
certificates, the indenture and the Trust Indenture Act.
47
For a complete understanding of the certificates, you should review the terms
and conditions contained in the global certificate that we will issue to the
trustee, the indenture and the Trust Indenture Act, which include definitions of
certain terms used below. Copies of the form of the certificates and the
indenture are available from us at no charge upon request.
The certificates are secured by our assignment to the trustee of mortgage
backed promissory notes or mortgage secured bonds issued by churches and other
not-for profit religious organizations, which we own or will receive as a result
of loans we make to churches and other nonprofit religious organizations and
bonds we purchase. The mortgages securing the promissory notes will not be
assigned to the trustee nor will any bonds be re-registered to the trustee.
Further, we are not required to establish or maintain a sinking fund to provide
for payment of maturing certificates.
You may determine the amount (any multiple of $1,000) and term (2, 3, 4, 5,
6, 7, 8, 9, 10, 11, 12, 13, 14 or 15 years) of the certificates you would like
to purchase when you subscribe, subject to availability. However, we may not
always offer certificates of each maturity, depending on market conditions and
our capital requirements. Each certificate will mature on the anniversary of the
last day of the fiscal quarter in which the certificate is purchased. We will
set interest rates based on current market conditions and our need for capital.
Interest rates will not be derived from any reference or published interest
rate.
We have reserved $3,000,000 of the certificates in this offering for
exchange of the two, three and four-year series "A" certificates which began
maturing on June 30, 2004. Our plan is to allow investors who purchased the
series "A" certificates to exchange their certificates for series "B"
certificates for the same period of time at the new published rates. However, we
are under no obligation to renew any certificates. We will set interest rates
based on current market conditions and our need for capital. Investors may
choose not to exchange their series "A" certificates for series "B"
certificates. Any investor who chooses not to exchange their series "A"
certificates will have their principal investment returned to them and their
certificate will be retired. There were $684,000 certificates that matured in
2004. There are $1,321,000 certificates maturing in 2005 and $1,982,000 maturing
in 2006. Investors exchanged $267,000 in certificates in 2004 and $144,000 as of
June 30, 2005. Approximately 34% of certificate holders have elected to exchange
their certificates.
The interest rate will be fixed for the term of your certificate. As of the
date of this prospectus, rates we will pay for each maturity of certificates are
set forth below. The interest rate will vary based on the term to maturity of
the certificate you purchase.
- ------------------------------------------------------------------- ----------------------------------------------------------------
Certificate Term Interest Rate %
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
2 Year 4.00%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
3 Year 4.50%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
4 Year 4.75%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
5 Year 5.00%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
6 Year 5.50%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
7 Year 6.00%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
8 Year 6.25%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
9 Year 6.50%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
10 Year 7.00%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
11 Year 7.00%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
12 Year 7.00%
- ------------------------------------------------------------------- ----------------------------------------------------------------
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- ------------------------------------------------------------------- ----------------------------------------------------------------
13 Year 7.00%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
14 Year 7.25%
- ------------------------------------------------------------------- ----------------------------------------------------------------
- ------------------------------------------------------------------- ----------------------------------------------------------------
15 Year 7.50%
- ------------------------------------------------------------------- ----------------------------------------------------------------
Upon acceptance of your subscription to purchase certificates, the trustee,
who is also acting as our servicing agent, will create an account in our
book-entry registration system for you and credit the principal amount of your
subscription to your account. Our trustee will send you a book-entry receipt
that will indicate our acceptance of your subscription. If we reject your
subscription, all funds deposited will be promptly returned to you without any
interest. Investors whose subscriptions for certificates have been accepted and
anyone who subsequently acquires certificates in a qualified transfer are
referred to as "holders" or "registered holders" in this document and in the
indenture.
We may modify or supplement the terms of the certificates described in this
prospectus from time to time in a supplement to this prospectus. Except as set
forth under "Amendment, Supplement and Waiver" below, any modification or
amendment will not affect then-outstanding certificates. However, investors are
advised to check for prospects supplements as interest rates are subject to
change.
Denomination. You may purchase certificates in principal amount of
multiples of $1,000. You will determine the original principal amount of each
certificate you purchase when you subscribe.
Term and Maturity. We are offering certificates with terms ranging from two
years to fifteen years as follows:
o two (2) years o nine (9) years
o three (3) years o ten (10) years
o four (4) years o eleven (11) years
o five (5) years o twelve (12) years
o six (6) years o thirteen (13) years
o seven (7) years o fourteen (14) years
o eight (8) years o fifteen (15) years
You will select the term of each certificate you purchase when you subscribe,
depending on availability. You may purchase multiple certificates with different
terms by filling in investment amounts for more than one term.
The maturity date will be the anniversary of the last day of the
calendar quarter in which you purchase your certificate. For example, if you
purchase a ten (10) year certificate on July 10, 2004, the certificate will
mature on September 30, 2014. We may cease offering specified maturities, and
re-continue their offering, at any time during the offering period.
Collateral. We will assign to the trustee to secure the certificates
mortgage-secured promissory notes and bonds issued by churches and other
nonprofit religious organizations evidencing loans made by us which have an
aggregate unpaid principal balance of at least 100% of the aggregate outstanding
principal amount of the certificates. We will not assign the mortgages securing
the assigned promissory notes and bonds to the trustee.
We will be obligated to replace a promissory note or bond that we have
assigned to the trustee if the church obligor prepays the promissory note or
bond or if it defaults in the payment of principal or interest on the promissory
note or bond and the default continues for at least 90 days. We will assign
additional promissory notes and bonds to the trustee as necessary to maintain
the aggregate outstanding principal balance of the assigned notes at a level of
at least 100% of the outstanding principal balance of the certificates sold in
this offering.
49
We will furnish the following to the trustee in connection with our
assigning mortgage-secured promissory notes to the trustee:
o An opinion of counsel to the effect that all necessary action has been
taken to create and perfect a first lien and security interest in
favor of the trustee in the assigned promissory notes and bonds.
o Annual opinions of counsel to the effect that all necessary action has
been taken to maintain a first lien and security interest in favor of
the trustee in the assigned promissory notes and bonds.
o Annual certification of our officers that all provisions of the
indenture relating the deposit, release and substitution of collateral
have been complied with.
Generally, neither we, nor the trustee will be required to provide reports
to holders concerning the deposit, release or substitution of promissory notes
and bonds securing the certificates. However, the trustee will be required to
report to holders if we default in our obligations to maintain the 100%
collateral coverage requirement and that default has not been cured within 60
days.
To the extent not collateralized, the certificates will constitute a
subordinated claim again the issuer.
Interest Rate. The interest rate on a particular certificate will be the
interest rate for the particular term of the certificate at the time of
subscription or renewal. Please see the "Interest Rate" chart above. The
interest rate will remain fixed for the original or renewal term of the
certificate. We will set interest rates based on current market conditions and
our need for capital. Interest rates will not be derived from any reference or
published interest rate. We will establish and may change the interest rates
payable for unsold certificates of various terms in a supplement to this
prospectus.
Computation of Interest. We will compute interest on certificates on the
basis of an actual calendar year. Interest will accrue from the date of
purchase, but will not be compounded. The date of purchase will be the first
business day immediately following the date we receive funds. Our business days
are Monday through Friday, except for legal holidays recognized by the National
Association of Securities Dealers, Inc.
Interest Payment Dates. Interest will be payable quarterly and interest
checks will be mailed to certificate holders on the last day of each calendar
quarter (i.e., March 31, June 30, September 30 and December 31). If the last day
of a quarter falls on a weekend or a holiday, we will pay interest on the next
business day.
Place And Method Of Payment. We will pay principal and interest on the
certificates through the trustee, who will act as our paying agent, by check
mailed on each interest payment date to your address appearing in the
certificate register. If the foregoing payment method is not available,
principal and interest on the certificates will be payable at our principal
executive office or at such other place as we may designate for payment
purposes. We will not wire interest payments to holders of certificates.
Servicing Agent. We have engaged Herring Bank, who is also acting as the
trustee in this offering, to act as our servicing agent for the certificates.
The trustee's responsibilities as servicing agent will include serving as our
registrar and transfer agent and fulfilling certain of our responsibilities to
the holders.
You may contact the trustee as follows with any questions about the
certificates:
Herring Bank
1001 South Harrison Street
Amarillo, TX 79101
(800) 753-1439
Book-Entry Registration and Transfer. You will not receive or be entitled
to receive physical delivery of a certificate. The issuance and transfer of
certificates will be accomplished exclusively through the crediting and debiting
of the appropriate accounts in our book-entry registration and transfer system.
However, you will receive a book-entry acknowledgement from the trustee that
will show all pertinent information regarding your certificate, including the
principal amount of your certificate, its interest rate and maturity, and
verification of its registration. The trustee will maintain our book-entry
system.
50
The holders of the accounts established upon the purchase or transfer of
certificates will be deemed to be the owners of the certificates under the
indenture. The holders of certificates must rely upon the procedures established
by the trustee to exercise any rights of a holder of certificates under the
indenture. The servicing agent will determine the interest payments to be made
to the book-entry accounts and maintain, supervise and review any records
relating to book-entry beneficial interests in the certificates.
Book-entry notations in the accounts evidencing ownership of the
certificates are exchangeable for actual certificates only if: (i) we, at our
option, advise the trustee in writing of our election to terminate the
book-entry system, or (ii) after the occurrence of an event of default under the
indenture, holders of the certificates aggregating more than 50% of the
aggregate outstanding amount of the certificates advise the trustee in writing
that the continuation of a book-entry system is no longer in the best interests
of the holders of certificates and the trustee notifies all registered holders
of the occurrence of any such event and the availability of definitive
certificates. Subject to the exceptions described above, the book-entry
interests in these securities will not be exchangeable for fully registered
certificates. The trustee will also issue fully registered certificates if
required by the administrator of an Individual Retirement Account or similar tax
deferred account in which a holder has acquired a certificate. The trustee may
charge a $10 fee per certificate issuance.
Right To Reject Applications. We may reject any application for
certificates in our sole discretion.
Renewal Or Payment On Maturity. Approximately 30 days prior to maturity of
your certificate, you will be notified that your certificate is about to mature
and whether we will allow you to renew the certificate. If we are offering
renewal of certificates, we will provide you with a schedule of interest rates
then in effect, which will apply if you elect to renew your certificate, along
with a form on which you may elect to renew or not to renew your certificate.
You will have until 10 days prior to the maturity date to exercise one of the
following options:
o You can inform us in writing on or before 10 days prior to the
scheduled maturity date that you would like to renew the certificate,
in which case the principal amount of your certificate will be renewed
for the same term at the interest rate we are offering at the time of
renewal and we will pay you accrued interest through the maturity date
of your certificate.
o You can do nothing or inform us that you would like us to pay the
certificate in full; in either case we will pay the principal amount
and accrued interest when due.
We reserve the right to stop offering the option to renew certificates and
to refuse to renew any certificate in our complete discretion. Interest will
accrue from the first day of each renewed certificate term. Each renewed
certificate will continue in all its provisions, including provisions relating
to payment, except that the interest rate payable during any renewed term will
be the interest rate that we are then offering at the time of renewal.
If your certificate is not renewed for any reason, no interest will accrue
after the stated date of maturity and we will pay you the principal and unpaid
accrued interest on your certificate within 5 business days of the stated
maturity date.
Redemption Prior To Stated Maturity. The certificates may be redeemed prior
to stated maturity only as set forth below. You will have no right to require us
to prepay any certificate prior to its maturity date except as indicated below.
Redemption By Us On Change of Control. We have the option to redeem all
outstanding certificates in the event that we are subject to a change of
control. If we exercise this option, we will give all certificate holders 30
days notice that we intend to redeem all outstanding certificates. A change of
control will be deemed to have occurred if any person is or becomes the
beneficial owner (as defined in Rule 13d-3 of the Securities Exchange Act of
1934, as amended) of shares of our capital stock entitling such person to
exercise 50% or more of the total voting power of all shares of our capital
stock entitled to vote in elections of directors (or the capital stock of any
successor of ours in the case of a merger or transfer of all or substantially
all of our assets).
Redemption By Us If Required By Our Bylaws. Our bylaws place certain
limitations on the amount of debt that we may have outstanding at any time. If
the aggregate amount of the certificates outstanding causes us to be in
violation of these limitations, we may redeem a sufficient amount of
certificates so that we will be brought back into compliance with these
limitations. We may redeem any of the certificates pursuant to this option, and
need not redeem the certificates on a pro rata basis. We will provide you with a
notice that your certificate has been selected for redemption because of these
limitations.
51
Offer to Redeem By Us Upon a Change of Our Advisor. Our advisor is
currently Church Loan Advisors, Inc. If we terminate our advisory agreement with
our current advisor for any reason, we will offer to redeem all certificates
outstanding as of the date of such termination. In such case, certificates will
be redeemable at the option of the holders. If we terminate our advisory
agreement with our current advisor, we will provide our certificate holders with
notices offering to redeem all outstanding certificates within 10 days of the
termination. Holders of outstanding certificates will have 30 days after the
date of the notice to inform us in writing whether they will require us to
redeem their certificates. The redemption price will be the principal amount of
the certificate, plus interest accrued and not previously paid up to the date of
redemption.
Redemption By The Holder Upon Death. Certificates may be redeemed upon the
death of a holder who is a natural person (including certificates held in an
individual retirement account), by his or her estate giving us written notice
within 45 days following his or her death. The redemption price will be the
principal amount of the certificate, plus interest accrued and not previously
paid up to the date of redemption. Subject to the limitations described below,
we will pay the redemption price within 10 days of receiving notice of the
holder's death. If spouses are joint registered holders of a certificate, the
election to redeem will apply when either registered holder dies. If the
certificate is held by a person who is not a natural person such as a trust,
partnership, corporation or other similar entity, the right of redemption upon
death does not apply. In addition, we will not be required to redeem any
certificates at the request of the holder in excess of $25,000 aggregate
principal amount for all holders per calendar quarter. For purposes of the
$25,000 limit, redemption requests will be honored in the order in which they
are received and any redemption request not honored in a calendar quarter will
be honored, to the extent possible, in the next calendar quarter. Redemptions in
the next calendar quarter are also subject to the $25,000 limitation. We will
not redeem certificates in connection with a holder's death if an uncured event
of default exists with respect to the outstanding certificates.
Discretionary Redemption. If you request us to redeem your certificate
prior to maturity, we may do so and charge you early redemption penalties, both
at our complete discretion.
Transfers. The certificates are not negotiable debt instruments and,
subject to certain exceptions, will be issued only in book-entry form. The
book-entry receipt issued upon our acceptance of a subscription is not a
negotiable instrument, and no rights of record ownership can be transferred
without our advisor's prior written consent. Transfers of certificates will
generally be prohibited. However, our advisor intends to approve transfers of
certificates upon a demonstrated need for liquidity, such as upon the death or
bankruptcy of a certificates holder, or to facilitate estate planning
objectives. Ownership of certificates may be transferred on our register only as
follows:
o The holder must deliver written notice requesting a transfer to the
trustee signed by the holder(s) or such holder's duly authorized
representative on a form to be supplied by our servicing agent.
o Our advisor must provide its written consent to the proposed transfer.
o The trustee may require a signature guarantee in connection with such
transfer.
Upon transfer of a certificate, the trustee will provide the new holder of
the certificate with a book-entry receipt which will evidence the transfer of
the account on our records. The record date of any transfer will be the last day
of the quarter in which the transfer is made. The transferee will be entitled to
all interest accruing in the quarter in which the transfer is made.
No Sinking Fund. We will not contribute funds to a separate account,
commonly known as a sinking fund, to repay principal or interest on the
certificates upon maturity or default.
Restrictive Covenants. The indenture contains certain covenants that
require us to maintain certain financial standards and restrict us from certain
actions as set forth below.
Maintenance of Certain Financial Standards. The indenture provides that, so
long as the certificates are outstanding:
o we will maintain a positive net worth, which includes shareholders'
equity and subordinated debt; and
o our long-term liabilities, will not exceed our shareholders' equity at
the end of any fiscal year.
Prohibition on Certain Actions. The indenture provides that, so long as the
certificates are outstanding:
52
o we will not pay any dividends on our common or preferred stock unless
there is no uncured event of default with respect to the certificates;
o we will not allow any other lien to be created or maintained on the
collateral securing the certificates; and
o we will not guarantee, endorse or otherwise become liable for any
obligations of any of our control persons, or other parties controlled
by or under common control with any of our control persons.
Consolidation, Merger Or Sale. The indenture generally permits a
consolidation or merger between us and another entity. It also permits the sale
or transfer by us of all or substantially all of our property and assets. These
transactions are permitted if:
o the resulting or acquiring entity, if other than us, is organized and
existing under the laws of a domestic jurisdiction and assumes all of
our responsibilities and liabilities under the indenture, including
the payment of all amounts due on the certificates and performance of
the covenants in the applicable indenture; and
o immediately after the transaction, and giving effect to the
transaction, no event of default under the indenture exists.
If we consolidate or merge with or into any other entity or sell or lease
all or substantially all of our assets, according to the terms and conditions of
the indenture, the resulting or acquiring entity will be substituted for us in
the indenture with the same effect as if it had been an original party to the
indenture. As a result, such successor entity may exercise our rights and powers
under the indenture, in our name and, except in the case of a lease, we will be
released from all our liabilities and obligations under the indenture and under
the certificates.
Events Of Default. The indenture provides that each of the following
constitutes an event of default:
o any default for thirty days in the payment of interest when due on the
certificates;
o any default for thirty days in payment of principal when due on the
certificates;
o if we default in our obligations to maintain the 100% collateral
coverage requirement and that default has not been cured within 60
days;
o our failure to observe or perform any material covenant or our breach
of any material representation or warranty, but only after we have
been given notice of such failure or breach and such failure or breach
is not cured within 30 days after our receipt of notice;
o defaults in certain of our other financial obligations; and
o certain events of bankruptcy or insolvency with respect to us.
If any event of default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then-outstanding certificates
may declare the unpaid principal of and any accrued interest on the certificates
to be due and payable immediately. In the case of an event of default arising
from certain events of bankruptcy or insolvency, with respect to us, all
outstanding certificates will become due and payable without further action or
notice. Holders of the certificates may not enforce the indenture or the
certificates except as provided in the indenture. Subject to certain
limitations, holders of a majority in principal amount of the then-outstanding
certificates may direct the trustee in its exercise of any trust or power. The
trustee may withhold from holders of the certificates notice of any continuing
default or event of default (except a default or event of default relating to
the payment of principal or interest) if the trustee determines that withholding
notice is in the interest of the holders.
The holders of a majority in aggregate principal amount of the certificates
then outstanding by notice to the trustee may, on behalf of the holders of all
of the certificates, waive any existing default or event of default and its
consequences under the indenture, except a continuing default or event of
default in the payment of interest on, or the principal of, the certificates.
53
Amendment, Supplement And Waiver. Except as provided in this prospectus or
the indenture, the terms of the certificates then outstanding may be amended or
supplemented with the consent of the holders of at least a majority in principal
amount of the certificates then outstanding, and any existing default or
compliance with any provision of the indenture or the certificates may be waived
with the consent of the holders of a majority in principal amount of the then
outstanding certificates.
Notwithstanding the foregoing, an amendment or waiver will not be effective
with respect to certificates held by a holder who has not consented if it has
any of the following consequences, unless holders of at least 80% of the
outstanding principal amount of the certificates consent to the amendment or
waiver:
o reduces the principal of or changes the fixed maturity of any
certificate or alters the redemption provisions or the price at which
we shall offer to redeem the certificate;
o reduces the interest rate of or changes the time for payment of
interest on any certificate;
o waives a default or event of default in the payment of principal or
premium, if any, or interest on or redemption payment with respect to
the certificates except a rescission of acceleration of the
certificates by the holders of at least a majority in aggregate
principal amount of the then outstanding certificates and a waiver of
the payment default that resulted from such acceleration;
o makes any certificate payable in money other than United States
currency;
o makes any change in the provisions of the indenture relating to
waivers of past defaults or the rights of holders of certificates to
receive payments of principal of or interest on the certificates;
o modifies or eliminates holders' redemption rights; or
o makes any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of the
certificates, we or the trustee may amend or supplement the indenture or the
certificates:
o to cure any ambiguity, defect or inconsistency;
o to provide for assumption of our obligations to holders of the
certificates in the case of a merger or consolidation;
o to make any change that would provide any additional rights or
benefits to the holders of the certificates or that does not
materially adversely affect the legal rights under the indenture of
any such holder, including an increase in the aggregate dollar amount
of certificates which may be outstanding under the indenture;
o to modify our policy regarding redemptions elected by a holder of
certificates and our policy regarding redemptions of the certificates
upon the death of any holder of the certificates, but such
modifications shall not materially adversely affect any then
outstanding certificates;
o to comply with requirements of the SEC in order to effect or maintain
the qualification of the indenture under the Trust Indenture Act; or
o to maintain our status as a REIT.
The Trustee. Herring Bank has agreed to be the trustee under the indenture.
The indenture contains certain limitations on the rights of the trustee, should
it become one of our creditors, to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any claim as security or
otherwise. The trustee will be permitted to engage in other transactions with
us.
54
The indenture provides that in case an event of default specified in the
indenture shall occur and not be cured, the trustee will be required, in the
exercise of its power, to use the degree of care of a reasonable person in the
conduct of his own affairs. Subject to such provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any holder of certificates, unless the holder has offered to
the trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Resignation Or Removal Of The Trustee. The trustee may resign at any time,
or may be removed by the holders of a majority of the principal amount of
then-outstanding certificates. In addition, upon the occurrence of contingencies
relating generally to the insolvency of the trustee or the trustee's
ineligibility to serve as trustee under the Trust Indenture Act of 1939, as
amended, we may remove the trustee or a court of competent jurisdiction may
remove the trustee upon petition of a holder of certificates. However, no
resignation or removal of the trustee may become effective until a successor
trustee has been appointed.
No Personal Liability Of Directors, Officers, Employees, Shareholders and
Servicing Agent. No director, officer, employee, incorporator or shareholder of
ours or our servicing agent, will have any liability for any of our obligations
under the certificates, the indenture or for any claim based on, in respect to,
or by reason of, these obligations or their creation. Each holder of the
certificates waives and releases these persons from any liability. The waiver
and release are part of the consideration for issuance of the certificates. We
have been advised that the waiver may not be effective to waive liabilities
under the federal securities laws since it is the view of the Securities and
Exchange Commission that such a waiver is against public policy.
Service Charges. We and the trustee may assess service charges for changing
the registration of any certificate to reflect a change in name of the holder or
transfers (whether by operation of law or otherwise) of a certificate.
Variations By State. We may offer different securities and vary the terms
and conditions of the offer (including, but not limited to, different interest
rates and maturity dates) depending upon the state where the purchaser resides.
Interest Withholding. We or the trustee will withhold the required portion
of any interest paid to any investor who has not provided us with a Social
Security Number, Employer Identification Number, or other satisfactory
equivalent in the account application (or another document) or where the
Internal Revenue Service has notified us that back-up withholding is otherwise
required.
Liquidity. There is no market for the certificates. We do not believe that
a public market will develop for the certificates. You may not be able to sell
your certificates. You should be prepared to hold any certificates you purchase
until maturity.
Reports. We publish and file with the Securities and Exchange Commission
annual reports on form 10-KSB containing financial statements and quarterly
reports on 10-QSB containing financial information for the first three quarters
of each fiscal year. We will send copies of our reports at no charge to any
certificate holder who requests them in writing.
55
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS
Our organizational documents, consisting of Amended and Restated Articles
of Incorporation and Amended and Restated Bylaws, were reviewed and ratified by
our directors (including our independent directors) on May 19, 1995. The
following is a summary of certain provisions of these documents. This summary is
qualified in its entirety by specific reference to the organizational documents
filed as exhibits to the registration statement of which this prospectus is a
part. On May 28, 2004 at a regular annual meeting of shareholders, a majority of
our shareholders voted for amendments to our bylaws in certain technical
aspects.
Certain Articles of Incorporation and Bylaws Provisions
Shareholders' rights and related matters are governed by the Minnesota
Business Corporation Act, our Amended and Restated Articles of Incorporation and
the Amended and Restated Bylaws. Certain provisions of our articles of
incorporation and bylaws, which are summarized below, may make it more difficult
to change the composition of our board and may discourage an attempt by a person
or group to obtain control of us through acquisitions of shares.
Shareholder Meetings
Our bylaws provide for annual meetings of shareholders. Special meetings of
shareholders may be called by (i) our Chief Executive Officer, (ii) a majority
of the members of our board of directors or a majority of our independent
directors, or (iii) shareholders holding at least 10% of the outstanding shares
of common stock entitled to vote at the meeting.
Board of Directors
Our bylaws provide that our board establishes the number of our directors,
which may not be fewer than three (3) nor more than nine (9), and a majority of
which must be independent directors. Any vacancy will be filled by a majority of
the remaining directors, except that a vacancy of an independent director
position must follow a nomination by the remaining independent directors. The
directors may leave a vacancy unfilled until the next regular meeting of the
shareholders.
Limitations on Director Actions
Without concurrence of a majority of the outstanding shares, the directors
may not: (i) amend our articles or bylaws, except for amendments which do not
adversely affect the rights, preferences and privileges of shareholders
including amendments to provisions relating to, director qualifications,
fiduciary duty, liability and indemnification, conflicts of interest, investment
policies or investment restrictions; (ii) sell all or substantially all of our
assets other than in the ordinary course of our business or in connection with
liquidation and dissolution; (iii) cause us to merge with another entity or
otherwise reorganize; or (iv) cause us to dissolve or liquidate.
A majority of the then outstanding shares may, without the necessity for
concurrence by our directors, vote to: (i) amend the bylaws; (ii) terminate the
corporation; or (iii) remove the directors.
Minnesota Anti-Takeover Law
We are governed by the provisions of Sections 302A.671 and 302A.673 of the
Minnesota Business Corporation Act. In general, Section 302A.671 provides that
the shares of a corporation acquired in a "control share acquisition" have no
voting rights unless voting rights are approved in a prescribed manner. A
"control share acquisition" is an acquisition, directly or indirectly, of
beneficial ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring person to have
voting power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a public Minnesota corporation from engaging in a "business
combination" with an "interested shareholder" for a period of four years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's stock.
56
Restrictions on Roll-Ups
"Roll-up" means a transaction involving our acquisition, merger,
conversion, or consolidation (either directly or indirectly) and the issuance of
securities of a roll-up entity. Such term does not include: (i) a transaction
involving our securities that have been for at least 12 months listed on a
national securities exchange or traded through the NASDAQ National Market
System; or (ii) a transaction involving the conversion to corporate, trust, or
association form if, as consequence of the transaction, there will be no
significant adverse change in any of the following: (a) shareholders' voting
rights; (b) our term of existence; (c) sponsor or advisor compensation; (d) our
investment objectives. "Roll-up entity" means a partnership, real estate
investment trust, corporation, trust, or other entity created or surviving after
the completion of a roll-up transaction.
In connection with a roll-up, an appraisal of all of our assets would be
required to be obtained from a competent independent expert. The appraiser would
evaluate all relevant information, indicate the value of the assets as of a date
immediately prior to the announcement of the roll-up and assume an orderly
liquidation of the assets over a 12-month period. Notwithstanding the foregoing,
we may not participate in any proposed roll-up which would:
>> result in our shareholders having rights to meeting less frequently or
which are more restrictive to shareholders than those provided in our
bylaws;
>> result in our shareholders having voting rights that are less than
those provided in our bylaws;
>> result in our shareholders having greater liability than as provided
in our bylaws;
>> result in our shareholders having rights to receive reports that are
less than those provided in our bylaws;
>> result in our shareholders having access to records that are more
limited than those provided in our bylaws;
>> include provisions which would operate to materially impede or
frustrate the accumulation of shares by any purchaser of the
securities of the roll-up entity (except to the minimum extent
necessary to preserve the tax status of the roll-up entity);
>> limit the ability of an investor to exercise the voting rights of its
securities in the roll-up entity on the basis of the number of the
shares held by that investor;
>> result in investors in the roll-up entity having rights of access to
the records of the roll-up entity that are less than those provided in
our bylaws; or
>> place upon us any of the costs of the transaction if the roll-up is
not approved by the shareholders.
Nothing prevents our participation in any proposed roll-up resulting in
shareholders having rights and restrictions comparable to those contained in our
bylaws, with the prior approval of a majority of our shareholders.
Shareholders voting against a proposed roll-up have the choice of (i)
accepting the securities of the roll-up entity offered in the proposed roll-up;
or (ii) one of either: (a) remaining as our shareholders and preserving their
interests therein on the same terms and conditions as previously existed, or (b)
receiving cash in an amount equal to the shareholders' pro rata share of the
appraised value of our net assets. We do not intend to participate in a roll-up
transaction.
Limitation on Total Operating Expenses
Our bylaws provide that, subject to the conditions described in this
paragraph, our annual total operating expenses cannot exceed the greater of 2%
of our average invested assets or 25% our net income, computed before interest
expense. The independent directors have a fiduciary responsibility to limit our
annual total operating expenses to amounts that do not exceed the foregoing
limitations. The independent directors may determine that a higher level of
operating expenses is justified for such period because of unusual and
non-recurring expenses. Any such finding by the independent directors and the
reasons in support thereof must be recorded in the minutes of the meeting of the
board of directors. We will send a written disclosure to our shareholders within
60 days after the end of any fiscal quarter for which operating expenses (for
the 12 months then ended) exceed 2% of the average invested assets or 25% of net
income. In the event the operating expenses exceed the limitations described
above and if our directors are unable to conclude that such excess was justified
then within 60 days after the end of our fiscal year,
57
our advisor must reimburse us for the amount by which the aggregate annual total
operating expenses paid or incurred by us exceed the limitation.
Transactions with Affiliates
Our bylaws restrict our dealings with our advisor, sponsor and any director
or affiliates thereof. In approving any transaction or series of transactions
with such persons or entities, a majority of our directors not otherwise
interested in such transaction, including a majority of the independent
directors must determine that:
(a) the transaction as contemplated is fair and reasonable to us and our
shareholders and its terms and conditions are not less favorable to us
than those available from unaffiliated third parties;
(b) if the transaction involves compensation to any advisor or its
affiliates for services rendered in a capacity other than contemplated
by the advisory arrangements, such compensation is not greater than
the customary charges for comparable services generally available from
other competent unaffiliated persons and is not in excess of
compensation paid to any advisor and its affiliates for any comparable
services;
(c) if the transaction involves the making of loans (other than in the
ordinary course of our business) or the borrowing of money, the
transaction is fair, competitive, and commercially reasonable and no
less favorable to us than loans between unaffiliated lenders and
borrowers under the same circumstances; and
(d) if the transaction involves the investment in a joint venture, the
transaction is fair and reasonable and no less favorable to us than to
other joint venturers.
If the proposed transaction involves a loan to any advisor, director or any
affiliate thereof, or to a wholly-owned subsidiary of ours, a written appraisal
of the underlying property must be obtained from an independent expert. The
appraisal must be maintained in our records for at least five years and be
available for inspection and duplication by any shareholder. Such loan is
subject to all requirements of our Financing Policy.
We cannot borrow money from any advisor, director or any affiliate thereof,
unless a majority of our directors (including a majority of the independent
directors) not otherwise interested in the transaction approve the transaction
as being fair, competitive, and commercially reasonable and no less favorable to
us than loans between unaffiliated parties under the same circumstances.
We cannot make or invest in any mortgage loans subordinate to any mortgage
or equity interest of our advisor, directors, sponsors or any of our affiliates.
Restrictions on Investments
The investment policies and restrictions set forth in our bylaws have been
approved by a majority of our independent directors. In addition to other
investment restrictions imposed by the directors consistent with our objective
to qualify as a REIT, we will observe the guidelines and prohibitions on our
investments set forth in our bylaws. These guidelines and prohibitions are
discussed at the section headed "Our Business-Prohibited Investments and
Activities."
58
PLAN OF DISTRIBUTION
General
The underwriter is offering the certificates pursuant to the terms and
conditions of a distribution agreement (a copy of which is filed as an exhibit
to the Registration Statement of which this prospectus is a part). The
underwriter is offering $23,000,000 principal amount of certificates on our
behalf on a "best efforts" basis. "Best efforts" means that the underwriter is
not obligated to purchase any certificates. This is a "no minimum" offering. No
minimum principal amount of certificates must be sold, and we will receive the
proceeds from the sale of certificates as they are sold. This offering will be
conducted on a continuous basis pursuant to applicable rules of the Securities
and Exchange Commission and will terminate upon completion of the sale of all
certificates. We may terminate this offering at any time.
Compensation
We will pay to the underwriter a commission based on the principal amount
of certificates sold. The amount of this commission is 3.0% for sales of new
certificates sold and 1.5% for sales of certificates sold on renewal of matured
certificates. We will also pay the underwriter a 1.0% management fee upon the
original issuance of each certificate. We will not pay an underwriter's
management fee on renewals of maturing certificates.
We have agreed to pay the underwriter a non-accountable expense allowance
of up to $120,000 to reimburse the underwriter for certain expenses incurred by
it in connection with the offer and sale of the shares, $20,000 of which is
payable upon the sale of $1,000,000 of certificates, and the balance ($100,000)
is payable ratably based on the principal amount of certificates sold
thereafter. In no event or circumstance will the compensation paid to the
underwriter in connection with the offer and sale of the certificates exceed ten
percent (10%) commission and a one-half of one percent (.5%) due diligence fee.
Other Compensation Information We will not pay or award any commissions or
other compensation to any person engaged by a potential investor for investment
advice to induce such person to advise the investor to purchase shares or
certificates. This provision does not prohibit the normal sales commission
payable to a registered broker-dealer or other properly licensed person for
selling certificates.
Subscription Process
Our certificates will be offered to the public through the underwriter and
soliciting dealers. The certificates are being sold when, as and if we receive
and accept account applications. We have the right to accept or reject any
application. If we reject your application, your funds will be returned to you,
without interest. We will not accept applications for less than $1,000 for each
maturity term of certificates.
The underwriter may offer the certificates through its own registered
representatives and broker-dealers who are members of the NASD ("soliciting
dealers"). The underwriter may re-allow to soliciting dealers a portion of its
commissions, fees and reimbursable expenses payable to it under the distribution
agreement. In no event will the compensation re-allowed by the underwriter to
soliciting dealers exceed the total of compensation payable to the underwriter
under the distribution agreement.
Clients of soliciting dealers who wish to purchase certificates will
receive a confirmation of their purchase directly from the underwriter and must
remit payment for the purchase of certificates directly to the underwriter
payable to "American Investors Group, Inc."
A sale will be deemed to have been made on the date reflected in the
written confirmation. The confirmation will be sent to each purchaser by the
underwriter on the first business day following the date upon which we advise
the underwriter in writing that a application has been accepted. Generally,
payment for certificates should accompany the account application. However, the
underwriter must receive payment of the purchase price by the settlement date
set forth in the confirmation. You may rescind your purchase of certificates for
up to five (5) business days after you receive a final prospectus.
The distribution agreement provides for reciprocal indemnification between
us and the underwriter against certain liabilities in connection with this
offering, including liabilities under the Securities Act of 1933.
59
The foregoing discussion of the material terms and provisions of the
distribution agreement is qualified in its entirety by reference to the detailed
terms and provisions of the distribution agreement, a copy of which has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
Determination of Investor Suitability
We, the Underwriter and each soliciting dealer will make reasonable efforts
to determine that those persons being offered or sold the certificates are
appropriate in light of the suitability standards set forth herein and are
appropriate to such investor's investment objectives and financial situation.
The soliciting dealer must ascertain that you can reasonably benefit from an
investment in our certificates. The following shall be relevant to such
determination: (i) you are capable of understanding the fundamental aspects of
our business, which capacity may be evidenced by the following: (a) employment
experience; (b) educational level achieved; (c) access to advice from qualified
sources, such as attorneys, accountants, tax advisors, etc.; and (d) prior
experience with similar investments; (ii) you have apparent understanding of (a)
the fundamental risk and possible financial hazards of this type of investment;
(b) the lack of liquidity of this investment; (c) that the investment will be
directed and managed by the Advisor; and (d) the tax consequences of the
investment; and (iii) you have the financial capability to invest in our
certificates.
By executing your account application, each soliciting dealer acknowledges
its determination that the certificates are a suitable investment for you, and
will be required to represent and warrant its compliance with the applicable
laws requiring the determination of the suitability of the certificates as an
investment for you. In addition to the foregoing, we will coordinate the
processes and procedures utilized by the Underwriter and soliciting dealers and,
where necessary, implement additional reviews and procedures deemed necessary to
determine that you meet the suitability standards set forth herein. The
Underwriter and/or the soliciting dealers must maintain for at least six (6)
years a record of the information obtained to determine that you meet the
suitability standards imposed on the offer and sale of certificates and your
representation that you are investing for your own account or, in lieu of such
representation, information indicating that you met the suitability standards.
Suitability of the Investment
Our certificates are suitable only for investment by persons who have
adequate financial means and can commit their investment for the full term of
the certificates purchased. You will be required to provide us with certain
financial information in your account application. You may purchase up to $5,000
of certificates if you meet one of the following standards: (i) a net worth
(excluding home, home furnishings and automobiles) of at least $30,000 and a
minimum gross income (without regard to investment in the certificates) of at
least $30,000; or (ii) a net worth (excluding home, home furnishings and
automobiles) of at least $100,000. To purchase in excess of $5,000 of
certificates, you must meet one of the following standards: (i) a net worth
(excluding home, home furnishings and automobiles) of at least $45,000 and a
minimum gross income (without regard to investment in the certificates) of at
least $45,000; or (ii) a net worth (excluding home, home furnishings and
automobiles) of at least $150,000. In the case of gifts to minors or purchases
in trusts, the suitability standards must be met by the custodian or the
grantor. By acceptance of the confirmation of purchase or delivery of the
certificates, you will represent satisfaction of the applicable suitability
standards and acknowledge receipt of this prospectus.
Suitability standards may be higher in certain states. You must meet all of
the applicable requirements set forth in the account application.
The account application to be signed by all purchasers of the Series B
Secured Investors Certificates contains an arbitration agreement. By this
agreement, each purchaser agrees that all controversies relating to the
Certificates will be determined by arbitration before the NASD.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons pursuant to our
bylaws, or otherwise, we have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is therefore, unenforceable.
60
LEGAL MATTERS
Certain legal matters, including the legality of the certificates being
offered hereby and certain federal income tax matters, are being passed upon for
us by Winthrop & Weinstine, P.A., Minneapolis, Minnesota.
EXPERTS
Our balance sheets as of December 31, 2004 and 2003 and related statements
of operations, stockholder's equity and cash flows for the years ended December
31, 2004, 2003, and 2002 included in this prospectus have been audited by
Boulay, Heutmaker, Zibell and Company, P.L.L.P., independent registered public
accountants, as set forth in the report thereon appearing elsewhere herein, and
are included herein in reliance upon such report given on the authority of said
firm as experts in accounting and auditing.
REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION
Our advisor will keep, or cause to be kept, full and true books of account
on an accrual basis of accounting, in accordance with generally accepted
accounting principles ("GAAP"). All books of account, together with a copy of
our Articles and any amendments thereto, will be maintained at our principal
office, and will be open to inspection, examination and duplication at
reasonable times by our shareholders or their agents. We will provide to
shareholders, upon request, a list of the names and addresses of all of our
shareholders by mail. The shareholders will also have the right to inspect our
records in the same manner as shareholders of any other Minnesota corporation.
Our shareholders have rights under our bylaws to inspect our records that are in
addition to those available under applicable federal and state law.
We will send an annual report to shareholders in connection with our annual
meeting. We prepare our annual report on Securities and Exchange Commission Form
10-KSB.
Our regular accountants will prepare our federal and state tax returns. We
will submit tax information to shareholders within 90 days following the end of
each fiscal year. A specific reconciliation between GAAP and income tax
information will not be provided to the shareholders. Reconciling information
will be available in our office for inspection and review by any shareholder.
Dividend check statements will reflect the number of shares owned by each of our
shareholders.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the shares of
common stock we are offering to sell. This prospectus is part of the
registration statement but does not include all of the information contained in
the registration statement. You should refer to the registration statement and
its exhibits for additional information. Whenever we make reference in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete, and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document.
When we complete this offering, we will also be required to file annual,
quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission. We anticipate making these documents
publicly available, free of charge, on our website at
http://www.americaninvestors.com as soon as reasonably practicable after filing
such documents with the Securities and Exchange Commission.
You can read the registration statement and our future filings with the
Securities and Exchange Commission over the Internet at the Securities and
Exchange Commission's website at http://www.sec.gov. You may also read and copy
any document that we file with the Securities and Exchange Commission at its
public reference room at Station Place, 100 F Street NE, Washington, DC 20549.
61
AMERICAN CHURCH MORTGAGE COMPANY
INDEX TO FINANCIAL STATEMENTS
Financial Statements
Report of Independent Auditors F-1
Balance Sheet at June 30, 2005 and 2004 F-2
Balance Sheet at December 31, 2004 and 2003 F-4
Statements of Operations for years ended December 31, 2004, 2003, 2002
and the six-month periods ended June 30, 2005 and 2004 F-6
Statements of Stockholders' Equity for the years ended December 31, 2004,
2003 and 2002 and the six month period ended June 30, 2005 F-7
Statements of Cash Flows for the years ended December 31, 2004, 2003,
2002 and the six-month periods ended June 30, 2005 and 2004 F-9
Notes to Financial Statements F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNT FIRM
Board of Directors
American Church Mortgage Company
Minnetonka, Minnesota
We have audited the accompanying balance sheet of American Church Mortgage
Company as of December 31, 2004 and 2003 and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2004, 2003 and 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Church Mortgage
Company as of December 31, 2004 and 2003, and the results of its operations and
its cash flows for the years ended December 31, 2004, 2003 and 2002, in
conformity with U.S. generally accepted accounting principles.
/s/ Boulay, Heutmaker, Zibell & Co., P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
February 24, 2005
F-1
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
June 30
ASSETS 2005 2004
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and equivalents $ 1,442,982 $ 2,325,357
Accounts receivable 127,017 67,061
Interest receivable 146,894 134,075
Current maturities of mortgage loans receivable, net of
allowance of $155,218 and $85,000 at June 30, 2005 and 2004
578,124 2,496,705
Prepaid expense 9,386 11,001
Deferred Offering Costs
Current maturities of bond portfolio 80,000 49,000
----------- -----------
Total current assets 2,384,403 5,083,199
Mortgage Loans Receivable, net of current maturities 32,335,328 25,100,288
Real Estate Held for Sale 444,095 120,000
Deferred Secured Investor Certificates Offering Costs,
net of accumulated amortization of $406,654 and $228,584 at
June 30, 2005 and 2004 767,221 530,988
Bond Portfolio, net of current maturities 9,558,384 7,628,044
Other 60,000 60,000
---------- ----------
Total assets $45,549,431 $38,522,519
========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-2
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
June 30
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current maturities of secured investor certificates $ 1,698,000 $ 952,000
Accounts payable 238,896 46,131
Mortgage loan commitment 31,610
Deferred income 30,992 33,393
Dividends payable 414,631 388,255
------------ ----------
Total current liabilities 2,414,129 1,419,779
Deferred Income, net of current maturities 588,220 512,410
Secured Investor Certificates, Series A 12,452,000 13,920,000
Secured Investor Certificates, Series B 7,477,000
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 2,551,568 and 2,546,094 at June 30, 2005 and
2004 25,516 25,461
Additional paid-in capital 23,416,468 23,321,854
Accumulated deficit (823,902) (676,985)
------------ ------------
Total stockholders' equity 22,618,082 22,670,330
---------- ----------
Total liabilities and equity $45,549,431 $38,522,519
========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-3
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
December 31
ASSETS 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and equivalents $ 2,183,735 $ 4,368,769
Accounts receivable 59,844 61,423
Interest receivable 139,809 135,648
Current maturities of mortgage loans receivable, net of
allowance of $70,000 and $52,111 at
December 31, 2004 and 2003 645,338 919,859
Current maturities of bond portfolio 50,000 54,000
--------- ---------
Total current assets 3,078,726 5,539,699
Mortgage Loans Receivable, net of current maturities 30,630,292 25,383,192
Real Estate Held for Sale 105,000 156,352
Deferred Secured Investor Certificates Offering Costs,
net of accumulated amortization of $317,483 and
$143,339 at December 31, 2004 and 2003 732,715 568,458
Bond Portfolio, net of current maturities 8,448,001 5,431,286
Other 60,000 60,000
---------- ----------
Total assets $43,054,734 $37,138,987
========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-4
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current maturities of secured investor certificates $ 1,321,000 $ 684,000
Accounts payable 23,278 17,296
Mortgage loan commitment 37,726
Deferred income 37,479 31,630
Dividends payable 478,420 411,481
------------ ------------
Total current liabilities 1,897,903 1,144,407
Deferred Income, net of current maturities 575,909 556,673
Secured Investor Certificates, Series A 13,243,000 13,573,000
Secured Investor Certificates, Series B 4,621,000
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 2,551,568 at December 31, 2004
and 2,452,277 shares at December 31, 2003 25,516 24,523
Additional paid-in capital 23,416,468 22,471,234
Accumulated deficit (725,062) (630,850)
------------ ------------
Total stockholders' equity 22,716,922 21,864,907
---------- ----------
Total liabilities and equity $43,054,734 $37,138,987
========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-5
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
2005 2004
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 1,833,768 $1,513,227
Operating Expenses 449,249 329,849
--------- --------
Operating Income 1,384,519 1,183,378
Other Expense
Interest expense 622,203 437,725
Income Taxes - -
-------- -------
Net Income $762,316 $745,653
======= =======
Basic and Diluted Income Per Common Share $ .30 $ .30
======= =======
Weighted Average Common Shares Outstanding 2,551,568 2,503,080
========= =========
Notes to Financial Statements are an integral part of this Statement.
F-6
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 3,153,104 $ 2,459,254 $1,785,443
Operating Expenses
Other operating expenses 574,023 406,362 376,852
Real estate impairment loss 51,352 60,000 -
-------- ---------- -----------
Total operating expenses 625,375 466,362 376,852
-------- ---------- -----------
Operating Income 2,527,729 1,992,892 1,408,591
Other Expense
Interest expense 929,529 692,138 118,650
Income Taxes - - -
-------- --------- ---------
Net Income $1,598,200 $1,300,754 $1,289,941
========= ========= =========
Basic and Diluted Income Per Common Share $ .63 $ .55 $ .66
========= ========= =========
Weighted Average Common Shares Outstanding 2,522,852 2,345,604 1,964,428
========= ========= =========
Notes to Financial Statements are an integral part of this Statement.
F-7
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 1,769,774 $ 17,698 $ 16,256,712 ($ 201,115)
Issuance of 464,544 shares of
common stock, net of offering
costs 464,544 4,645 4,194,541
Redemption of 28,750 shares of
common stock (28,750) (287) (268,455)
Net income 1,289,941
Dividends declared (1,496,369)
--------- ------ ---------- ---------
Balance, December 31, 2002 2,205,568 22,056 20,182,798 (407,543)
Issuance of 263,292 shares of
common stock, net of offering
costs 263,292 2,633 2,439,755
Redemption of 16,583 shares of
common stock (16,583) (166) (151,319)
Net income 1,300,754
Dividends declared (1,524,061)
--------- ------ --------- ----------
Balance, December 31, 2003 2,452,277 24,523 22,471,234 ( 630,850)
Issuance of 108,935 shares of
common stock, net of offering
costs 108,935 1,089 1,027,285
Redemption of 9,644 shares of
common stock (9,644) (96) (82,051)
Net income 1,598,200
Dividends declared (1,692,412)
--------- ------- ---------- ----------
Balance, December 31, 2004 2,551,568 $25,516 $23,416,468 ( $725,062)
F-8
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Stockholders' Equity (continued)
Net income 762,316
Dividends declared (861,156)
--------- ------ ---------- ---------
Balance, June 30, 2005 2,551,568 $25,516 $23,416,468 ( $823,902)
========= ====== ========== ========
Notes to Financial Statements are an integral part of this Statement.
F-9
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
2005 2004
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $762,316 $745,653
Adjustments to reconcile net income to net cash
from operating activities:
Amortization of deferred certificate offering costs 89,171 85,244
Deferred income 5,824 (42,500)
Impairment loss on real estate 36,352
Provision for losses on mortgage loans receivable 85,218 32,889
Change in assets and liabilities
Accounts receivable (67,173) (5,638)
Interest receivable (7,085) 1,573
Prepaid expenses (9,386) (11,001)
Account payable (8,382) 28,835
Loan proceeds payable (6,116)
------- -------
Net cash from operating activities 844,387 871,407
Cash Flows from Investing Activities
Investment in mortgage loans (4,679,510) (3,900,000)
Collections of mortgage loans 2,617,375 2,573,169
Investment in bonds (1,095,000) (3,193,000)
Proceeds from bond portfolio 178,617 1,001,242
--------- ---------
Net cash used for investing activities (2,978,518) (3,518,589)
Cash Flows from Financing Activities
Proceeds from secured investor certificates 2,856,000 615,000
Payments on secured investor certificate maturities (414,000)
Proceeds from stock offering, net of offering costs 932,661
Payments for deferred certificate offering costs (123,677) (47,774)
Stock redemptions (81,103)
Dividends paid (924,945) (815,014)
------- -------
Net cash from financing activities 1,393,378 603,770
--------- -------
Net decrease in Cash (740,753) (2,043,412)
Cash and Equivalents - Beginning of Year 2,183,735 4,368,769
--------- ---------
Cash and Equivalents - End of Year $1,442,982 $2,325,357
========= =========
Notes to Financial Statements are an integral part of this Statement.
F-10
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows - Continued
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
200 2004
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Financing and
Investing Activities
Dividends payable $414,631 $388,255
======= =======
Bonds purchased in accounts payable $224,000
=======
Mortgage loans reclassified to real estate held for
sale $339,095
=======
Supplemental Cash Flow Information
Cash paid during the year for
Interest $622,203 $437,725
======= =======
Notes to Financial Statements are an integral part of this Statement.
F-11
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $1,598,200 $1,300,754 $1,289,941
Adjustments to reconcile net income to net cash
from operating activities:
Impariment loss on real estate 51,352 60,000
Provision for losses on mortgage loans receivable 17,889 (60,000) 101,000
Amortization of deferred bond offering costs 174,144 113,464 29,875
Deferred income 25,085 223,334 104,027
Change in assets and liabilities
Accounts receivable 1,579 2,179 (5,594)
Interest receivable (4,161) (41,263) (28,149)
Accounts payable 5,982 (22,394) 35,340
--------- --------- ---------
Net cash from operating activities 1,870,070 1,576,074 1,526,440
Cash Flows from Investing Activities
Investment in mortgage loans (12,180,264) (14,596,927) (5,261,000)
Collections of mortgage loans 7,227,522 3,325,417 1,995,300
Investment in bond portfolio (4,089,000) (2,763,890) (2,048,000)
Proceeds from bond portfolio 1,076,285 1,635,241 853,874
---------- ---------- ---------
Net cash used for investing activities (7,965,457) (12,400,159) (4,459,826)
Cash Flows from Financing Activities
Proceeds from secured investor certificates 5,360,000 6,829,000 7,428,000
Payments on secured investor certificate maturities (432,000)
Proceeds from stock offering, net of offering costs 1,028,374 2,442,392 4,199,186
Payments for deferred certificate offering costs (338,401) (304,752) (378,755)
Deferred equity offering costs 28,293
Stock redemptions (82,147) (151,485) (268,742)
Dividends paid (1,625,473) (1,474,521) (1,478,932)
--------- --------- ---------
Net cash from financing activities 3,910,353 7,340,634 9,529,050
--------- --------- ---------
Net Increase (Decrease) in Cash and Equivalents (2,185,034) (3,483,451) 6,595,664
Cash and Equivalents - Beginning of Year 4,368,769 7,852,220 1,256,556
--------- --------- ----------
Cash and Equivalents - End of Year $2,183,735 $4,368,769 $7,852,220
========= ========= =========
Notes to Financial Statements are an integral part of this Statement.
F-12
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows - Continued
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Financing and
Investing Activities
Offering costs reclassified and charged to additional
paid-in capital $10,557 $49,478 $182,628
====== ====== =======
Dividends payable $478,420 $411,481 $361,941
======= ======= =======
Mortgage loan commitment $1,243,827
=========
Mortgage loans reclassified to real estate held for
sale $216,352
=======
Supplemental Cash Flow Information
Cash paid during the year for
Interest $929,529 $692,138 $131,367
======= ======= =======
Notes to Financial Statements are an integral part of this Statement.
F-13
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for interim statements and, therefore, do not include all
information and disclosures necessary for a fair presentation of results of
operations, financial position, and changes in cash flow in conformity with
generally accepted accounting principles. However, in the opinion of management,
such statements reflect all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of financial position, results of
operations, and cash flows for the period presented.
Nature of Business
American Church Mortgage Company, a Minnesota corporation, was incorporated on
May 27, 1994. The Company was organized to engage primarily in the business of
making mortgage loans to churches and other nonprofit religious organizations
throughout the United States, on terms that it establishes for individual
organizations.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates. The most
sensitive estimates relate to the allowance for mortgage loans, and the
valuation of the bond portfolio. It is at least reasonably possible that these
estimates could change in the near term and that the effect of the change, in
any, would be material to the financial statements.
Cash
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
The Company maintains its accounts primarily at two financial institutions. At
times throughout the year, the Company's cash and equivalents balances may
exceed amounts insured by the Federal Deposit Insurance Corporation. Cash in
money market funds is not Federally insured. The Company has not experienced any
losses in such accounts.
F-14
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
Bond Portfolio
The Company accounts for its bond portfolio under Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
The Company classifies its bond portfolio as "available-for sale."
Available-for-sale bonds are carried at fair value. Although no ready public
market for these bonds exists, management believes that their cost approximates
their fair value. During the six month period ended June 30, 2005, the Company
bought $1,319,000 bonds at or below par. During the six month period ended June
30, 2004, the Company bought $3,193,000 of bonds at or below par. During 2004,
the Company did not sell any of its bonds. During 2003, the Company sold $56,000
of its bonds below par (which was the Company's cost) to an affiliate of the
Advisor. During 2002, the Company sold $497,000 of its bonds at par, to an
affiliate of the Advisor (see Note 5). There were no losses on the sale of the
bonds in 2003 or 2002.
Allowance for Mortgage Loans Receivable
The Company records its loans at their estimated net realizable value. The
Company's loan policy provides an allowance for estimated uncollectible loans
based on its evaluation of the current status of its loan portfolio. This policy
reserves for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan. The Company policy
will reserve for the outstanding principal amount of a loan in the Company's
portfolio if the amount is in doubt of being collected. Additionally, no
interest income is recognized on impaired loans. At June 30, 2005, the Company
reserved $155,218 for twelve mortgage loans, five of which are three or more
payments in arrears. Of those five loans, one loan in the amount of $400,000 is
considered impaired and is in the process of being foreclosed. At June 30, 2004
the Company reserved $85,000 for five mortgage loans totaling approximately
$1,800,000 that are three or more payments in arrears, two of which are in the
process of being foreclosed. At December 31, 2004, the Company reserved $70,000
for three mortgage loans that are three or more payments in arrears, two of
which are in the process of being foreclosed. At December 31, 2003, the Company
reserved $52,111 for four mortgage loans that are three or more mortgage
payments in arrears. At December 31, 2002, the Company reserved $112,111 for two
mortgage loans that are three or more mortgage payments in arrears, one of which
was in the process of being foreclosed. The total impaired loans were $740,247,
$0 and $228,441 at December 31, 2004, 2003 and 2002, respectively.
Real Estate Held for Sale
Foreclosure was completed on a church located in Battle Creek, Michigan valued
at $105,000 at June 30, 2005 and December 31, 2004. The church congregation
disbanded, and the church property is currently unoccupied. The Company owns and
has taken possession of the church and has listed the property for sale through
a local realtor.
Foreclosure was also completed on a church located in Tyler, Texas valued at
$339,095 at June 30, 2005. The church congregation is now meeting in a different
location, and the church property is currently
F-15
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
unoccupied. The Company owns and has taken possession of the church and is in
the process of listing the property for sale through a local realtor.
Deferred Offering Costs
Deferred equity offering costs are charged to stockholders' equity when equity
subscriptions are received. Deferred secured investor certificate offering costs
are amortized over the term of the certificates using the straight line method.
Revenue Recognition
Interest income on mortgage loans and the bond portfolio is recognized as
earned.
Deferred income represents loan origination fees, which are recognized over the
life of the loan as an adjustment to the yield on the loan.
Dividend Re-investment Plan
Dividends re-invested to purchase common stock were $156,393 for the six-month
period ended June 30, 2004, and $231,140, $266,850 and $217,419 for the years
ended December 31, 2004, 2003 and 2002, respectively. The dividend re-investment
plan was discontinued in 2004.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences in recognition of income from loan origination
fees for financial and income tax reporting.
The Company has elected to be taxed as a Real Estate Investment Trust (REIT).
Accordingly, the Company will not be subject to Federal income tax to the extent
of distributions to its shareholders if the Company meets all the requirements
under the REIT provisions of the Internal Revenue Code.
Income Per Common Share
No adjustments were made to income for the purpose of calculating earnings per
share.
Newly Issued Pronouncements
The Company has considered the accounting pronouncements issued after December
2004 and has determined that none of these pronouncements will have a material
impact on its financial statements.
F-16
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
Repurchase of Common Stock
Although our common shares are not redeemable by us, we may at our complete
discretion repurchase shares offered to us from time to time by our
shareholders. In such event, we may pay whatever price the Advisor deems
appropriate and reasonable, and any such shares repurchased will be
re-designated as "unissued," will no longer be entitled to distribution of
dividends and will cease to have voting rights. Shares that may be purchased are
not part of a publicly announced plan to repurchase shares nor does the Company
plan or anticipate any stock repurchase plans.
2. MORTGAGE LOANS AND BOND PORTFOLIO
At June 30, 2005, the Company had mortgage loans receivable totaling
$33,068,670. The loans bear interest ranging from 6.75% to 12.00%. The Company
also had a portfolio of secured church bonds at June 30, 2005, which are carried
at cost plus amortized interest income, which approximates fair value. The bonds
pay either semi-annual or quarterly interest ranging from 3.50% to 11.20%. The
combined principal of $9,654,790 at June 30, 2005 is due at various maturity
dates between November 1, 2005 and December 15, 2029.
At December 31, 2004, the Company had first mortgage loans receivable totaling
$31,345,630. The loans bear interest ranging from 6.75% to 12.00%. At December
31, 2003, the Company had first mortgage loans receivable totaling $26,355,162
that bore interest ranging from 6.00% to 12.00%.
The Company also had a portfolio of secured church bonds at December 31, 2004
and 2003, which are carried at cost plus amortized interest income. The bonds
pay either semi-annual or quarterly interest ranging from 3.50% to 12.00%. The
combined principal of $8,533,790 at December 31, 2004 is due at various maturity
dates between May 1, 2005 and March 1, 2029. Five bond issues comprised 87% of
the Company's bond portfolio at December 31, 2004. Six bond issues comprised 84%
of the Company's bond portfolio at December 31, 2003.
At June 30, 2004, the Company had mortgage loans receivable totaling
$27,681,993. The loans bear interest ranging from 6.75% to 12.00%. The Company
also had a portfolio of secured church bonds at June 30, 2004, which are carried
at cost plus amortized interest income, which approximates fair value. The bonds
pay either semi-annual or quarterly interest ranging from 3.50% to 11.20%. The
combined principal of $7,723,860 at June 30, 2004 is due at various maturity
dates between November 1, 2004 and March 1, 2029.
F-17
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
The maturity schedule for mortgage loans and bonds receivable as of June 30,
2005 and December 31, 2004 is as follows:
June 30, 2005 June 30, 2005 December 31, 2004 December 31, 2004
Mortgage Loans Bond Portfolio Mortgage Loans Bond Portfolio
(Unaudited) (Unaudited)
2005 $ 578,124 $ 80,000 $ 645,388 $ 50,000
2006 757,966 48,000 754,591 89,000
2007 828,238 184,000 814,841 184,000
2008 891,072 89,000 890,969 89,000
2009 931,946 73,000 924,912 73,000
Thereafter 29,081,324 9,180,790 27,314,929 8,048,790
---------- --------- ---------- ---------
33,068,670 9,654,790 31,345,630 8,533,790
Less loan loss reserves (155,218) (70,000)
Less Discount from par (16,406) (35,789)
---------- ------- ---------- -------
Totals $ 32,913,452 $9,638,384 $31,275,630 $8,498,001
========== ========= ========== =========
3. SECURED INVESTOR CERTIFICATES
Secured investor certificates (see Note 6) are composed of Series A and Series B
certificates. They are debt securities with essentially identical terms,
differing only in the maturity dates of the certificates and the interest rates
paid on them. The certificates are collateralized by certain mortgage loans
receivable of approximately the same value as the certificates. Additionally,
the Company incurred deferred offering costs related to the debt offering. The
maturity schedule for the secured investor certificates at June 30, 2005 and
December 31, 2004, is as follows:
June 30, 2005 December 31, 2004
Secured Investor Secured Investor
Certificates Certificates
(Unaudited)
2005 $ 1,698,000 $ 1,321,000
2006 1,344,000 2,249,000
2007 3,105,000 2,900,000
2008 2,485,000 2,374,000
2009 4,631,000 4,604,000
Thereafter 8,364,000 5,737,000
--------- ---------
$21,627,000 $19,185,000
========== ==========
F-18
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
Interest expense related to these certificates for the six month periods ended
June 30, 2005 and 2004 and for the year ended December 31, 2004, 2003 and 2002
was $622,203, $437,725, $929,529, 692,138 and $118,650, respectively.
4. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with Church Loan Advisors, Inc., a
Minnesota corporation (the "Advisor"). The Advisor is responsible for the
day-to-day operations of the Company and provides office space, administrative
services and personnel.
Under the terms of the Advisory Agreement, the Company pays the Advisor an
annual base management fee of 1.25 percent of average invested assets (generally
defined as the average of the aggregate book value of the assets invested in
securities and equity interests in and loans secured by real estate) up to $35
million, 1.00 percent of assets from $35 million to $50 million, and 0.75
percent on assets in excess of $50 million, which is payable on a monthly basis.
The Advisor will also receive one-half of the origination fees paid by a
mortgage loan borrower in connection with a mortgage loan made or renewed by the
Company. The Company incurred Advisory management and origination fees of
approximately $267,334 and $142,909 for the six month periods ended June 30,
2005 and 2004, respectively, and $450,000, $545,000 and $291,000 during 2004,
2003, and 2002, respectively.
The Advisor and the Company are related through common ownership and common
management. See Notes 1 and 6 for additional transactions.
5. INCOME TAXES
As discussed in Note 1, a REIT is subject to taxation to the extent that taxable
income exceeds dividend distributions to its shareholders. In order to maintain
its status as a REIT, the Company is required to distribute at least 90% of its
taxable income. In 2004, the Company had pretax income of $1,598,200 and
distributions to shareholders in the form of dividends during the tax year of
$1,692,412. The expected tax expense to the Company, pre-dividends would have
been $543,388.
In 2003, the Company had pretax income of $1,300,754 and distributions to
shareholders in the form of dividends during the tax year of $1,524,061. The
expected tax expense to the Company, pre-dividends would have been $442,256.
In 2002, the Company had pretax income subject to tax of $1,289,941 and
distributions to shareholders in the form of dividends during the tax year of
$1,496,369. The expected tax expense to the Company, pre-dividends, would have
been $438,580 in 2002.
F-19
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
The following reconciles the income tax benefit with the expected provision
obtained by applying statutory rates to pretax income at December 31:
2004 2003 2002
---- ---- ----
Expected tax expense $543,388 $442,256 $438,580
Benefit of REIT distributions (575,420) (518,181) (508,289)
Valuation allowance 32,032 75,925 69,709
------- ------- -------
Totals $ - $ - $ -
======= ======= =======
The components of deferred income taxes are as follows at December 31:
2004 2003
---- ----
Loan origination fees $208,552 $200,023
Loan loss allowance 23,800 17,718
Real estate impairment 37,860 20,400
Valuation allowance (210,212) (178,141)
-------- --------
$60,000 $60,000
====== ======
The total deferred tax assets are as follows at December 31:
2004 2003
---- ----
Deferred tax assets $270,212 $238,141
Deferred tax asset valuation allowance (210,212) (178,141)
-------- -------
Net deferred tax asset $60,000 $60,000
====== ======
The change in the valuation allowance was $32,074, $75,934 and $69,709 for 2004,
2003 and 2002, respectively.
6. PUBLIC OFFERINGS OF THE COMPANY'S COMMON STOCK
The Company filed a Registration Statement with the Securities and Exchange
Commission for a third public offering of its common stock in August 1999. The
Company offered 1,500,000 shares of its common stock at a price of $10 per
share. The offering was underwritten by an underwriter (an affiliate of the
Advisor) on a "best efforts" basis, and no minimum sale of stock was required.
The stock sale commenced on September 23, 1999 and concluded September 23, 2001.
A total of 569,207 shares were sold during the Company's third public offering.
In December 2001, the Company filed a Registration Statement with the Securities
and Exchange Commission for a fourth public offering of its common stock and its
first public offering of debt
F-20
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
securities, which the Securities and Exchange Commission declared effective
April 30, 2002. In May 2003, the Company extended the offering period to May
2004. The Company concluded its fourth public offering on April 30, 2004. The
Company offered 1,500,000 shares of its common stock at a price of $10 per share
and $15,000,000 principal amount of Series "A" secured investor certificates.
The certificates pay quarterly interest with two, three, four, five and
seven-year maturities with interest rates ranging from 5.00% to 7.00%.
Certificates could be purchased in any multiple of $1,000. The offering was
underwritten by American Investors Group, Inc. (an affiliate of the Advisor) on
a "best efforts" basis, and no minimum sale of stock or certificates were
required. The Company sold 763,471 shares and $15,000,000 of its Series "A"
secured investor certificates during its fourth public offering. As of December
31, 2003 and 2002, respectively, the Company had sold 671,450 and 452,424 shares
of common stock and $14,257,000 and $7,428,000 of its Series "A" secured
investor certificates.
Pursuant to the terms of the Underwriting Agreement, the Company incurred
expense to the managing underwriter and participating broker-dealers commissions
and non-reimbursable expenses of approximately $286,988, $449,154 and $669,579
during 2004, 2003 and 2002, respectively, in connection with these last two
public offerings.
In July 2004, the Company filed a Registration Statement with the Securities and
Exchange Commission for a second public offering of debt securities, which the
Securities and Exchange Commission declared effective October 7, 2004. The
Company is offering $23,000,000 principal amount of its Series B secured
investor certificates. Certificates may be purchased in any multiple of $1,000.
As of December 31, 2004 and June 30, 2005, respectively, we have sold $4,621,000
and $7,477,000 of Series B secured investor certificates.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of which
are held for trading purposes, are as follows at June 30, 2005 and 2004 and
December 31, 2004 and 2003:
June 30, June 30,
2005 2004
----------------------------------------- ------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $ 1,442,982 $ 1,442,982 $ 2,325,357 $ 2,325,357
Accounts receivable 127,017 127,017 67,061 67,061
Interest receivable 146,894 146,894 134,075 134,075
Mortgage loans receivable 32,913,452 32,913,452 27,596,993 27,596,993
Bond portfolio 9,638,384 9,638,384 7,677,044 7,677,044
Secured investor certificates 21,627,000 21,627,000 14,872,000 14,872,000
F-21
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
June 30, 2005 and 2004 (Unaudited)
December 31, 2004, 2003 and 2002
December 31, December 31,
2004 2003
----------------------------------- -----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $ 2,183,735 $ 2,183,735 $ 4,368,769 $ 4,368,769
Accounts receivable 59,844 59,844 61,423 61,423
Interest receivable 139,809 139,809 135,648 135,648
Mortgage loans receivable 31,275,630 31,275,630 26,303,051 26,303,051
Bond portfolio 8,498,001 8,498,001 5,485,286 5,485,286
Secured investor certificates 19,185,000 19,185,000 14,257,000 14,257,000
The carrying value of cash and equivalents approximates fair value. The carrying
value of the mortgage loans receivable approximates fair value because of the
substantial turnover and activity in this portfolio. The carrying value of the
bond portfolio approximates fair value because of minimal changes in interest
rates and quality of the underlying collateral since initial purchase. The
carrying value of the secured investor certificates approximates fair value
because the interest rates at which the certificates have been sold have not
changed significantly in the past year.
8. LINE OF CREDIT
The Company obtained a $1,000,000 line of credit with its bank, Beacon Bank of
Shorewood, MN, on July 22, 1999, which was increased to $2,000,000 on March 18,
2002, subject to certain borrowing base limitations, through August 1, 2005.
Interest is charged at 1/2% over the prime rate totaling 6.75% at June 30, 2005,
5.75% at December 31, 2004, 5.00% at June 30, 2004, and 4.50% at December 31,
2003. The line of credit is collateralized by the mortgage secured bonds held by
the Company. There was no balance outstanding at June 30, 2005 or December 31,
2004 and 2003. There was no interest expense related to the line of credit for
June 30, 2005 and 2004 and December 31, 2004 and 2003.
F-22
Account Application Account Number:
__ New Account (check one) _____________________
__ Update Years Known: _________
1. Account Registration: (Check One):
__ Individual __ Joint Tenants with Rights of Survivorship __ Corporate* __ Non-Profit*
__ Custodial __ Community Property __ Partnership* __ Trust*
__ Investment Club* __ Pension/Profit Sharing Plan* __ Sole Proprietorship* __ Estate*
__ IRA* __ Joint Tenants in Common (50%/50% unless otherwise noted _____% __ __ TOD/POD
*Additional Paperwork May Be Required
2. Account Registration:
- -------------------------------------------------------------------------------------------------------------------------------
Full Legal Name: Individual/Corporation/Trust/IRA Trustee Social Security Number
- -------------------------------------------------------------------------------------------------------------------------------
Full Legal Name: Co-Applicant/Minor/Trustees Social Security Number
- -------------------------------------------------------------------------------------------------------------------------------
Home Address: (P.O. Box Unacceptable) City State Zip Length at Residence
- -------------------------------------------------------------------------------------------------------------------------------
Alternate Mailing Address (P.O. Box Acceptable) City State Zip
- ----------------- ----------------------- ------------------------------- -------------------------------
Date of Birth Date of Birth (Co-Applicant) Daytime Phone Evening Phone
- ------------------------- ----------------------------------------------------- -------------------------------
Fax Number E-mail Address Name of your Bank
3. Customer Identification Program (CIP)
To help the United States fight the funding of terrorism and money laundering
activities, Federal law requires us to obtain, verify and record information
that identifies each person who opens an account with us.
Individuals: __ Driver's License __ Govt. or State Issued I.D. __ Entities__ Trust Agreement Dated: __________________
Issuer: _________________________________________________________ __ Articles of Incorporation
I.D. Number: ____________________________________________________ __ Partnership Agreement
Date of Issuance: ______________ Date of Expiration ______________Other: ____________________________________________
4. Investor Information
Marital Status: __ Single __ Married __ Divorced __ Widowed Number of Dependents: ____________ U.S. Citizen? __ Yes __ No*
Employment Information: (Please specify if unemployed, retired, homemaker or student.
If unemployed or retired please indicate your former occupation)
- --------------------------------------------------------------------------------------------------------------------------------
Employer (If self-employed, please specify name of business.) Occupation or former Occupation
- ------------------------
Length of current Employment
Co-Applicant's Employment Information: (Please specify if unemployed, retired, homemaker or student.
If unemployed or retired please indicate your former occupation)
- --------------------------------------------------------------------------------------------------------------------------------
Employer (If self-employed, please specify name of business.) Occupation or former Occupation
- -------------------------
Length of Current Employment
Page 1 of 2
Account Application ________________ Account Number:
(Continued)
4. Investor Information (Continued):
Investment Objectives (Check all that apply):
__ Capital Preservation: Preserving the value of your existing assets by
investing in securities with a smaller degree of risk of loss of principal.
__ Income: Generating current income rather than generating capital
appreciation.
__ Growth: Generating capital appreciation by investing in securities with a
higher degree of volatility and risk of loss of principal, which will
generate little if any current income.
__ Speculation: Trading volatile securities with a higher than average
possibility of loss of principal with the hope of achieving significant
capital appreciation.
Financial Information Primary Applicant __ Check Here If You Are Combining Financial Information
Estimated Liquid Net Worth
Investment Experience (# of Estimated Annual Estimated Net Worth (Cash, Bank C.D.'s, Liquid Securities) Tax Bracket
Years) Income
__ Stocks ________ ___ Under $25,000 ___ Under $50,000 ___ Under $50,000 __ 10%
__ Bonds ________ ___ $25,001 - $50,000 ___ $50,000 - $100,000 ___ $50,000 - $100,000 __ 15%
__ Mutual Funds ________ ___ $50,001 - $75,000 ___ $100,001 - $150,000 ___ $100,001 - $150,000 __ 25%
__ Municipal Bonds________ ___ $75,001 - $100,000 ___ $150,001 - $250,000 ___ $150,001 - $250,000 __ 28%
__ Limited ___ $100,001 - $175,00 ___ $250,001 - $500,000 ___ $250,001 - $500,000 __ 33%
Partnerships ________ ___ $175,001 - $250,00 ___ $500,001 - $1,000,000 ___ $500,001 - $1,000,000 __ 35%
___ $250,001 - $500,000 ___ Over $1,000,000 ___ Over $1,000,000
___ Over $500,001
- ------------------------------ ----------------------- -------------------------- ------------------------------------ -----------
Financial Information Co-Applicant (If Applicable):
Estimated Liquid Net Worth
Investment Experience (# of Estimated Annual Estimated Net Worth (Cash, Bank C.D.'s, Liquid Securities) Tax Bracket
Years) Income
__ Stocks ________ ___ Under $25,000 ___ Under $50,000 ___ Under $50,000 __ 10%
__ Bonds ________ ___ $25,001 - $50,000 ___ $50,000 - $100,000 ___ $50,000 - $100,000 __ 15%
__ Mutual Funds ________ ___ $50,001 - $75,000 ___ $100,001 - $150,000 ___ $100,001 - $150,000 __ 25%
__ Municipal Bonds________ ___ $75,001 - $100,000 ___ $150,001 - $250,000 ___ $150,001 - $250,000 __ 28%
__ Limited ___ $100,001 - $175,00 ___ $250,001 - $500,000 ___ $250,001 - $500,000 __ 33%
Partnerships ________ ___ $175,001 - $250,00 ___ $500,001 - $1,000,000 ___ $500,001 - $1,000,000 __ 35%
___ $250,001 - $500,000 ___ Over $1,000,000 ___ Over $1,000,000
___ Over $500,001
- ------------------------------ ----------------------- -------------------------- ------------------------------------ -----------
5. Account Agreement (Please read and sign)
Certification of Taxpayer ID Number (Substitute W-9): Under penalty of perjury,
you certify that (1) the number shown on this form is your correct taxpayer
identification number and (2) you are not subject to backup withholding because
(i) you are exempt from backup withholding, or (ii) you have not been notified
by the Internal Revenue Service (IRS) that you are subject to backup withholding
as a result of a failure to report all interest and dividends, or (iii) the IRS
has notified you that you are no longer subject to backup withholding and (3)
you are a U.S. person (including a U.S. resident alien).
Arbitration Agreement: The customer agrees, and by carrying an account for the
customer, American Investors Group, Inc. agrees that all controversies which may
arise between us concerning any transaction or the construction, performance, or
breach of this or any other agreement between us pertaining to securities,
whether entered into prior, on or subsequent to the date hereof, shall be
determined by arbitration. Any arbitration under this agreement shall be
conducted pursuant to the federal arbitration act before the National
Association of Securities Dealers, Inc. in accordance with the rules then
prevailing at the organization. Both parties agree that (i) arbitration is final
and binding on the parties. (ii) The parties are waiving their right to seek
remedies in court, including the right to jury trial. (iii) Pre-arbitration
discovery is generally more limited than and different from court proceedings.
(iv) The arbitrators' award is not required to include factual findings or legal
reasoning and the party's right to appeal or seek modification of rulings by the
arbitrators is strictly limited. (v) The panel of arbitrators will typically
include a minority of arbitrators who were or are affiliated with the securities
industry.
X __________________________________________ X ___________________________________________
Applicants Signature (Date) Co-Applicants Signature (Date)
FOR BROKER USE ONLY
Rep Last Name: ________________________ Rep #: ______________
X __________________________________________ X ___________________________________________
Registered Representative Signature (Date) Principals Signature (Date)
Page 2 of 2
EXHIBIT A
STATE SUITABILITY REQUIREMENTS
If you are a resident of one of the states listed below, you must represent that
you meet the financial suitability requirements for the state in which you live
to invest in the Series B Secured Investor Certificates of American Church
Mortgage Company. The investment firms that solicit purchases are required by
law to ask you whether you meet these requirements to determine whether a
purchase of the certificates is suitable for you. When you sign the account
application you are required to represent that you meet the suitability
standards contained under the caption "Who May Invest" (at page 11 of this
prospectus), and if applicable, the higher standards set forth in the table
below.
IF YOU ARE A RESIDENT OF ONE OF THE STATES BELOW, YOU MUST SATISFY THE NET WORTH
REQUIREMENT OR THE COMBINED NET WORTH- NET INCOME REQUIREMENT SET FORTH OPPOSITE
THE STATE. When considering the net worth standards, you cannot include the
value of your home, furnishings and automobiles.
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
STATE ALTERNATIVE 1 ALTERNATIVE 2 MINIMUM INVESTMENT MAXIMUM INVESTMENT
NET WORTH NET INCOME + NET
WORTH
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
Arizona $150,000 $45,000 net income N/A N/A
PLUS $45,000 net
worth
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
Arkansas $150,000 $45,000 net income N/A N/A
PLUS $45,000 net
worth
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
Kansas N/A N/A N/A It is recommended that Kansas
investors limit their investment to
no more than 10% of their net worth.
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
Massachusetts $225,000 $60,000 net income N/A N/A
PLUS $60,000 net
worth
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
Minnesota $150,000 $45,000 net income N/A N/A
PLUS $45,000 net
worth
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
North Dakota $150,000 $45,000 net income N/A N/A
PLUS $45,000 net
worth
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
Texas $150,000 $45,000 net income N/A 10% of net worth
PLUS $45,000 net
worth
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
Washington $150,000 $45,000 net income N/A N/A
PLUS $45,000 net
worth
- --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
================================================================ ==============================================================
Prospective investors may rely only on the information contained
in this prospectus. Neither American Church Mortgage Company American Church
nor the Underwriter has authorized anyone to provide any other Mortgage Company
information. This prospectus isn't an offer to sell to - nor is
it seeking an offer to buy securities from - any person in any
jurisdiction in which it is illegal to make an offer or
solicitation. The information here is correct only on the date
of this prospectus, regardless of the time of the delivery of
this prospectus or any sale of these securities.
TABLE OF CONTENTS
Prospectus Summary 1
Risk Factors 6
Who May Invest 11 $23,000,000 of Series B Investor Certificates
Use of Proceeds 12
Compensation to Advisor and Affiliates 13
Conflicts of Interest 15
Distributions 16
Capitalization 18
Selected Financial Data 19 PROSPECTUS
Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Our Business 24
Management 36
Security Ownership of Management and Other 38
Certain Relationships and Transactions With Management 39
The Advisor and the Advisory Agreement 40
Federal Income Tax Consequences Associated With
the Certificates 41
Federal Income Tax Consequences Associated With REITS 43
ERISA Consequences 44
Description of the Capital Stock 44
Description of the Certificates 45
Summary of the Organizational Documents 54
Plan of Distribution 57
Commission Position on Indemnification for Securities Act
Liabilities 58
Legal Matters 59
Experts 59
Reports to Shareholders and Rights of Examination 59
Additional Information 59
Index to Financial Statements F-1
Dealers effecting transactions in the securities offered by this prospectus,
whether or not participating in the offering, may be required to deliver a
prospectus until 45 days after completion of this offering. Dealers may also be American Investors Group, Inc.
required to deliver a prospectus when acting as underwriters and for their September __, 2005
unsold allotments or subscriptions.
================================================================================ ===============================================
II-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
Item Estimated Cost
---- --------------
SEC Registration Fee............................... $ 2,914
NASD Filing Fee.................................... $ 2,800
Blue Sky Qualification Fees and Expenses*.......... $ 20,000
Underwriter's Expense Allowance** $ 120,000
Printing and Engraving*............................ $ 5,000
Legal Fees and Expenses*........................... $ 45,000
Accounting Fees and Expenses*...................... $ 12,000
Miscellaneous*..................................... $ 12,286
----------
Total.......................................... $ 220,000
-------
* Estimated
** Assumes sale of all securities offered
Item 32. Sales to Special Parties.
None.
Item 33. Recent Sales of Unregistered Securities.
None.
Item 34. Indemnification of Directors and Officers.
Our articles require us to indemnify and pay or reimburse reasonable
expenses to any individual who is our present or former director, advisor or
affiliate, provided that: (i) the director, advisor or affiliate seeking
indemnification has determined, in good faith, that the course of conduct which
caused the loss or liability was in our best interest; (ii) the director,
advisor or affiliate seeking indemnification was acting on our behalf or
performing services on our behalf; (iii) such liability or loss was not the
result of negligence or misconduct on the part of the indemnified party, except
that in the event the indemnified party is or was an independent director, such
liability or loss shall not have been the result of gross negligence or willful
misconduct; and (iv) such indemnification or agreement to be held harmless is
recoverable only out of our assets and not from our shareholders directly.
We may advance amounts to persons entitled to indemnification for legal and
other expenses and costs incurred as a result of legal action instituted against
or involving such person if: (i) the legal action relates to the performance of
duties or services by the indemnified party for or on our behalf; (ii) the legal
action is initiated by a third party who is not a shareholder, or the legal
action is initiated by shareholder acting in his or her capacity as such and a
court specifically approves such advancement; and (iii) the indemnified party
receiving such advances undertakes, in writing, to repay the advanced funds,
with interest at the rate we determined, in cases in which such party would not
be entitled to indemnification.
Notwithstanding the foregoing, we may not indemnify our directors, advisor,
or affiliates and any persons acting as a broker-dealer for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities by such party unless one or more of the following conditions
are met: (i) there has been a successful adjudication on the merits of each
count involving alleged securities law violations as the particular indemnitee;
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee; or (iii) a court of
competent jurisdiction approves a settlement of the claims against a particular
indemnitee and finds that indemnification of the settlement and the related
costs should be made, and the court considering the request for indemnification
has been advised of the position of the Securities and Exchange Commission and
of the published position of any state securities regulatory authority in which
our securities were offered or sold as to indemnification for violations of
securities laws.
Subject to the limitations described above, we have the power to purchase
and maintain insurance on behalf of an indemnified party. We may procure
insurance covering our liability for indemnification. The indemnification
permitted by our Articles is more restrictive than permitted under the Minnesota
Business Corporation Act.
Item 35. Treatment of Proceeds From Stock Being Registered.
None.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements:
Annual Financial Statements
Report of Independent Auditor
Balance Sheet at December 31, 2004, 2003 and June 30, 2005
and 2004
Statements of Operations for years ended December 31, 2004,
2003, 2002 and the six month periods ended June 30,
2003 and 2004
Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003, 2002 and the six month period
ended June 30, 2005
Statements of Cash Flows for the years ended December 31,
2004, 2003, 2002 and the six month periods ended June
30, 2004 and 2005
Notes to Financial Statements
(b) Exhibits:
See attached exhibit index.
Item 37. Undertakings.
The undersigned registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) (ss. 230.424(b) of
this chapter) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
4) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934;
and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide
such interim financial information.
5) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
6) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
7) The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act in
accordance with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Act.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Minnetonka, state of Minnesota, on September __,
2005.
AMERICAN CHURCH MORTGAGE COMPANY
By /s/ Philip J. Myers
--------------------------------------
Philip J. Myers, President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Philip J. Myers and Scott J. Marquis, or either of them, such person's true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution for such person and in such person's name, place and stead, in
any and all capacities, to sign the Registration Statement on Form S-11 of
American Church Mortgage Company and any and all amendments (including
post-effective amendments) to the Registration Statement, and to file same, with
all exhibits hereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Kirbyjon H. Caldwell* Director September ___, 2005
- ---------------------------------------------------
Kirbyjon H. Caldwell
/s/ Dennis J. Doyle* Director September ___, 2005
- ---------------------------------------------------
Dennis J. Doyle
/s/ Michael G. Holmquist* Director September ___, 2005
- ---------------------------------------------------
Michael G. Holmquist
Director, President,
/s/ Philip J. Myers* Secretary and Treasurer September ___, 2005
- ---------------------------------------------------
Philip J. Myers
/s/ Robert O. Naegele, Jr.* Director September ___, 2005
- ---------------------------------------------------
- ---------------------------------------------------
Robert O. Naegele, Jr.
* By Philip J. Myers, attorney-in-fact
INDEX TO EXHIBITS
Exhibit No. Title
1 Distribution Agreement 2
3.1 Amended and Restated Articles of Incorporation 4
3.2 Third Amended and Restated Bylaws 2
4.1 Specimen Common Stock Certificate 4
4.2 Trust Indenture 2
5 Form of Opinion Letter of Winthrop & Weinstine, P.A. as to the legality of the securities 2
8 Opinion Letter of Winthrop & Weinstine, P.A. as to certain tax matters relating to the 2
securities
10.1 Amended and Restated REIT Advisory Agreement Between the Company and Church Loan Advisory, Inc. 5
dated May 19, 1995
10.2 Amendment No. 1 to Advisory Agreement Between the Company and Church Loan Advisors, Inc. dated 2
January 1, 1999
10.3 Line of Credit Agreement with Beacon Bank dated March 18, 2002 6
10.4 $2,000,000 Promissory Note and Combined Security Agreement between the Company and Beacon Bank 6
dated March 18, 2002
10.5 Security Agreement between the Company and The Herring National Bank, as Trustee 2
12 Statements Regarding Computation of Ratios 1
21 Subsidiaries of the Registrant 3
23.1 Consent of Counsel (included in Exhibit 5 and 8) 2
23.2 Consent of Auditor 1
24 Power of Attorney (included on signature page) 1
25 Statement of Eligibility of Trustee 2
- -----------------
(1) Filed herewith.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form S-11 filed June 29, 1999 (Commission File No.
333-81819).
(3) None.
(4) Incorporated herein by reference to the Company's Registration
Statement on Form 8-A filed April 30, 1999.
(5) Incorporated herein by reference to the Company's Registration
Statement on Form S-11 filed December 21, 2001
(6) Incorporated herein by reference to the Company's Registration
Statement on Form S-11/A filed April 26, 2002.